Life insurance is complex financial tool, which is unique in the way it provides financial stability and security for an insured’s beneficiaries. With this being said, every decision about one’s life insurance policy should be carefully looked over.
Replacing one’s life insurance policy for another policy is one of the biggest decisions you can make. It could either be a very good or very bad decision.
Before replacing your policy, ask yourself the following questions.
What do you wish a new policy to achieve that your existing policy does not?
Make sure that your new desired needs are tangible and still in your price range. Also, is discontinuing your life insurance policy worth these new objectives? Replacing your life insurance policy means starting from the beginning, which entails paying the first-year expenses (i.e., agent commission, issue and underwriting) for the second time.
Have you contact the current company to see if the existing policy can be modified to meet the desired needs?
Policy performance may actually be quite competitive, if all insurers have experienced the factors negatively affecting this performance. For example, the dramatic fall in interest rates over the last 20 years has lowered the returns of all traditional whole life and universal life policies to one degree or another.
What are the benefits of each policy?
Difference in the underlying investments of the old and new policies may make rate-of-return comparisons difficult or misleading, especially if the proposed new policy is variable and equity investments are contemplated in place of the old insurer’s fixed-income-oriented investment portfolio.
Investment returns obviously need to be adjusted for comparable risks and other factors affecting product performance – mortality, expenses and lapse rates – need to be considered as well.
With a policy comes a new suicide clause and incontestable period. Is that worth replacing your policy?
The suicide clause and incontestable period is a policy provision, which the company agrees not to contest the validity of the contract after it has been in-force for a certain period of time, usually two years. On the rare occasion, the replacing insurer may waive them.
Will the replacement qualify as a tax-free exchange under the Internal Revenue Code Section 1035?
This section allows for certain exchanges of life insurance to be made without the immediate recognition of gain. It allows the tax, that otherwise would be imposed on lump-sum disposition of certain policies and annuities, to be postponed.
Will you be able to qualify both financially and health-wise for the new coverage?
If you decide to replace your life insurance policy, you will have to go through another underwriting process and possibly a medical exam.
Have you been urged to borrow from a current policy or policies to finance the new coverage?
This is not a good idea and you should see outside help. Contact your adviser or insurance company if this is the case.
What happens to the death benefit in the replacement proposal?
Is this replacement proposal that attempts to increase the death benefit for an existing premium or to lower the premium for an existing death benefit, by guaranteeing a death benefits – but only to a certain advanced age, such as 95 or 100.
Purchasers of “permanent” insurance want their policies to be “permanent” and not to expire before their do, if they happen to live an especially long life.
If you seek further assistance or additional information, please feel free to email me at editor@lifequotes.com.
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.