Some policies provide a change of plan provision that gives the policyowner the privilege of exchanging the policy for some other contract issued by the company. In essence, this feature is an in house Code section 1035 exchange provision. In term contracts this generally is the conversion option that allows the policyowner to exchange a term contract for some form of permanent cash-value contract. In permanent cash value contracts, the privilege normally is to change to some other form of cash-value contract. In general, the insurer permits the exchange without evidence of insurability if the new permanent plan is a higher-premium, higher cash value type of policy. Also, the new policy generally must have the same policy date and the same underwriting class and issue age as the original policy.
Despite these commonalities, the companies’ change of plan provisions operate in diverse ways. In some contracts, the insurers allow certain types of exchanges only with the approval of the company. In a few other companies’ contracts, policyowners may exchange virtually any type of policy for any other type, including permanent for term, with evidence of insurability but otherwise without the need for approval by the company. In many contracts, the change of plan clause states that the new policy may not have any riders attached, even if the old policy included certain riders, unless the company agrees. Although in most cases companies permit existing riders to continue in the new policy, some companies’ change of plan clauses specifically state that riders may continue in the new policy without the need for special approval by the company.
Policy exchange fees also vary widely. In some contracts, the insurers treat the new policy as a new issue with new issue charges and commissions. In other cases, the insurers issue the new policy at net cost, that is, without new issue fees and commissions. These companies levy only a minimal charge to cover the administrative and clerical costs of processing the exchange.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM