What You Need to Know Before Changing Your Life Insurance Policy

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If you are approached by a life insurance agent and asked to consider canceling your current life insurance policy in order to purchase a replacement policy, there are a few things you should know.

Key Takeaways

  • You may have to go through medical underwriting if you apply for a new policy, which means you could be declined or charged a higher premium. 
  • A new policy will have a two-year period during which the insurance company will closely scrutinize any claims. 
  • If you have concerns about replacing a policy, get a second opinion from a trusted source, like an accountant.

6 Reasons to Change a Life Insurance Policy Checklist

  1. You find a cheaper life insurance policy
  2. You have a change in life circumstance
  3. You need to change or add a beneficiary 
  4. You find out there might be a better type of policy for you like whole life or term insurance.
  5. You change your financial strategy
  6. You want the cash value instead of borrowing from your life insurance policy

Before You Change or Cancel Your Life Insurance

As the policyholder of your life insurance policy, you are in control of your life insurance policy choices. Neither beneficiaries nor life insurance policies can be changed without your consent. The only exception to this may be if the beneficiary on your life insurance policy is irrevocable. The policyholder cannot change the irrevocable beneficiary without consent. 

5 Important Things to Consider

If you are considering canceling or changing your life insurance policy, these are the things you need to consider before making a choice. If you have explored all these options and done your research you are far more likely to come out on top.

The Life Insurance Medical Exam

When you purchased your life insurance policy, you may have taken a life insurance medical exam and "passed." If you try and get a new policy, and you have to take a new life insurance medical exam, you may not be eligible for a new policy or may have certain restrictions. You might even be uninsurable, or have to take a more expensive policy than you were originally quoted. It is a big risk to take. 

Compare Life Insurance Types

Before you change life insurance policies, review the different types of policy options: term, whole life or other permanent life policies like universal life insurance are some of the possibilities. 

Learn About Your Life Insurance Policy Waiting Period

You may have a policy or loan waiting period. You should also understand the contestable period and suicide provision. The incontestability clause is standard with life insurance policies and basically means that in the first two years of a new policy, your death benefit may be denied or contested. If your current policy is more than 2 years old, then this clause no longer applies. You would lose this advantage when switching to a new policy.

Consider Staying With Your Current Insurance Company and Converting the Policy

Make sure your agent has reviewed all your life insurance replacement or change options with you. Sometimes you might be able to convert your policy into what you are looking for and avoid the contestable period and medical exam as a result. Even if you can't convert your policy, you might also consider the option of adding another policy to supplement your current life insurance policy. it really depends on why you want to cancel or replace your life insurance in the first place. There are lots of ways a financial planner or knowledgeable agent can help you, make sure you review all the advice you can get before replacing your policy. If you have not been offered additional options, get a second opinion!

Compare the Costs of Replacing Your Life Insurance Policy

There are a number of costs that may come into play when you change your old life insurance policy for a new one. Here is a checklist of things to consider and ask about when replacing a life insurance policy besides the new life insurance policy premium.

Checklist to Compare Costs

  • Will there be costs to start a new policy?
  • How do the tax advantages compare to the old policy? Will there be tax consequences?
  • When and how you can take a loan on a new policy may be different
  • The cash value from your old policy may not be enough to pay the entire new policy in the future, which may result in additional payments
  • Depending on your age, you may pay more over the lifetime of a policy because of purchasing a new policy later in life
  • Life insurance is more expensive as you get older
  • Will the premiums or benefits vary from year to year?
  • Are there surrender fees on the policy you want to replace?

What Information Is Required?

Whenever you are surrendering a life insurance policy to replace it, you will be asked a series of questions. These questions are in place to protect you from scams and fraud and allows insurance companies to monitor situations to ensure things are being done properly.

Questions Asked To Protect You When Replacing Life Insurance

  • You will be asked for the current life insurance policy number, insurance carrier, and policy expiration 
  • You will be asked if you plan to replace your current policy with your new one

The questions asked when you replace a life insurance policy protect you and also protect the insurance company from agents who routinely change their client's life insurance policies to get a commission. This kind of behavior is known as churning when a life insurance agent is behaving questionably and creating repeat commissions for themselves on the same clients. 

Look Out For Scams

When choosing to make any changes in life insurance always obtain a second opinion and be aware of the warning signs of questionable actions of someone trying to convince you to change policies. Make sure you are not getting taken advantage of or scammed. 

Besides reviewing the list of considerations to know before changing your life insurance policy, it is important to know the warning signs of agents you want to stay away from. If an agent does any of these things you need to contact your state insurance commissioner's office and let them know about the situation. State commissioners are there to help protect the public interest, and in the case of questionable behavior of an agent or representative, they can help you protect yourself too.

Is Your Agent Licensed

If you feel uncomfortable or experience any of the warning signs below, you can also check to see if your agent and insurance company are licensed to sell insurance in your state by calling the National Association of Insurance Commissioners (NAIC) at 1-866-470-6242.

Agent Warning Signs

  • The agent warns you not to tell your current insurer and/or relatives that you are thinking about changing policies. This goes against insurance company procedures and is a sign that the agent may be involved in churning, or not licensed!
  • The life insurance agent tries to get you to sign forms that are not complete or you don't understand
  • The agent insists that using the cash value from your current policy to pay for the premiums on a new policy would offer an unbelievably huge advantage to you
  • The agent criticizes other agents and companies. This is unethical and unprofessional behavior and is definitely a warning sign.
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