Replace your Life Insurance Policy? Good Idea or Bad Idea?
Figuring out how much life insurance you need can be tricky. Our Needs Assessment Calculators make this first step easy though! You simply need to input dollar amounts for items you want covered and our calculator takes all the guesswork out of the equation. But I often get questions about one of these fields that asks for ‘Assets’. This field includes existing life insurance coverage you may already have. The outcome of the calculation assumes you are keeping that existing policy, as it would be used to pay off various debts you may have. This usually brings up the question: “Is it a good idea or bad idea to replace my current life insurance policy?” That’s a great question that requires careful consideration.
There are many factors to consider when determining if the replacement of an existing life insurance policy is in your best interest. Does a new policy have better benefits and features that make it more attractive? Are the premiums on the new policy more favorable than the current policy? Have your needs changed so much that the current policy is no longer adequate? Can you use current cash values of your policy to exchange into another policy that more effectively meets your needs? These are just a few reasons when replacing a life insurance policy may make sense.
Let’s take a look at some considerations that may justify you deciding to keep that current life insurance policy. Your current policy may have met the 2 year contestable period that most life insurance policies have. Once the insured has lived through the 2 year contestable period, the insurance carrier must pay a death claim including suicide, unless the insured committed fraud when applying for the original policy.
Has the insured’s health declined since the issue of the original policy? There may be attractive increases in cash values and dividends if the current policy is a permanent life insurance policy, such as whole life. There may be policy surrender charges reducing the cash surrender value that would be assessed if the current policy were a permanent life insurance product. Remember, there could be income tax consequences if the current policy was surrendered.
Many insurance carriers ask if the applicant is replacing existing life insurance policy for multiple reasons. The total amount of existing life insurance plus the new amount applied for are considered during the underwriting process. States also have various replacements of life insurance and annuities requirements that insurance carriers must follow. The new company that the insured is applying with must send a Notice of Proposed Replacement of Life Insurance to the existing insurance carrier stating that the insured may be replacing the policy. The notice will typically include the name and address of the proposed applicant, the current policy number and the name and address of the agent replacing the policy is a typical example of some state’s replacement guidelines.
About the author: Ken Buccico holds a LUTC designation and has been in the life insurance business for 39 years. His wealth of experience empowers clients to make best possible decision regarding a life insurance policy. To explore the best life insurance option, contact Ken at 1-800-651-1953 or KBuccico@Pivot.com.