Replacing Your Life Insurance

I’ve had many clients ask me for a “second opinion” after another advisor has recommended that they replace their life insurance policy. Replacing your existing policy may be a very good move for you and your family or it may only be a good idea for the advisor who’s recommending it. So how are you able to tell if this move makes sense for you?

The short answer is (usually) that if they’re talking about replacing a term policy that’s about to renew, it makes good sense. If the recommendation is to replace a permanent policy such as a whole life or universal life plan that’s been in force for awhile already, you better look very carefully. A permanent policy will be priced on your age when it was issued and this is locked in for life. If you were to replace this type of coverage at a later date, it will almost always cost more due to your older age.

Replacing your existing coverage can offer some significant advantages. In some cases, due to your health situation changing, a higher death benefit amount may be available for the same premium. For the same reasons, you could also elect to keep the coverage amount the same and pay a new lower premium. Most frequently though, we recommend a policy replacement when someone has a term policy and it’s coming up for renewal. The insurance company is required to renew the policy without new medical evidence of insurability but they do so at a price that is 3-5X the current market rate. By submitting a new medical and application, you can renew for a new term at the much lower market rates. For example: Client A bought a 10 year term policy in 2003 and was paying $25/month for the past 10 years. It’s up for renewal this spring and the rate will automatically jump to $75/month. By replacing this with a new term policy, he’ll instead pay the current market rate of $37/month.

So what are the main disadvantages of replacing an insurance policy? The number one concern when you replace a permanent policy is usually the length of time it’s been in force already – if you’re planning to replace a permanent policy, you might be giving up the value that’s grown from being in force for so long. If the pricing is based on your age 10 years ago, there needs to be some pretty significant reasons to make this change. Secondly, you need to carefully examine the features of your existing contract. Your old policy might include features or benefits that are no longer available with the new products. These differences must be fully explained and documented before you proceed.

Any licensed insurance advisor that is recommending a policy replacement is required by law to show you a written explanation of why they are recommending this replacement and what the pros and cons are of doing so. Unfortunately, this doesn’t always seem to happen. If you’re presented with a recommendation to replace your life insurance, make sure to find out all the details and make an informed decision. A second opinion wouldn’t hurt either.

Insurance products provided through multiple insurance carriers.
Mutual funds products are offered through Investia Financial Services Inc.