Replacing Life Insurance Policies: Important Considerations

Changing Needs

Lifes biggest moments – such as getting married, buying a house and having a baby – can change the type of life insurance you need to feel secure. It is important to keep your life insurance policies current in order to meet these needs. You may think it is necessary to cancel your current policy for a new one in order to account for changes in your life, but in most cases you do not need to get another life insurance policy to replace what you currently have. In many situations, the policy you own is your best bet.

Before deciding to replace your current policy, speak with your agent about updating your current policy. It is best to first assess your needs and decide what will be the best decision for the long term, including what is best for the people you are protecting. It is highly likely that you will be able to simply supplement or change the current policy to provide the coverage you need.

Regardless of how your needs have changed, it is important to review your life insurance policy every couple of years to keep up with changes in your income and family.

Compare the Current and New Policy Benefits

Before you say yes to a policy replacement, investigate your options and carefully compare both policy costs, features, and guaranteed minimum interest rates. Different products are designed not only for different people, but for a variety of situations.

Guidelines include:

Read over the illustration of your old policy and cost breakdown of premiums, cash surrender value and death benefits. Request an illustration for the new policy you are considering. Ask the agent who sold you the current policy for a detailed explanation why you should keep it, and ask the agent urging a new policy for an equally explicit argument as to why you should switch. Weigh both arguments carefully.

Of special note, an agent offering a variety of products will usually be better able to provide you with a policy that best suits your individual situation.

Even if both your present and proposed policies pay dividends, it may be years before the new policy's dividends will equal those under your present policy. If you replace one cash value policy with another, the cash value of the new policy may be relatively small for several years. In fact, the cash value of the new policy may never be as large as that of the original.

Remember that nobody knows what will happen in the future. You should be ready to adjust your financial plans if the cash value does not increase as quickly as shown in the illustration. You will be asked to sign a statement declaring you understand that some of the numbers in the illustration are not guaranteed.

The Consequences

It is important to understand and be aware of the consequences of canceling an existing life insurance policy to buy a new one. A few facts include:

If you are older or your health has changed, premiums for the new policy will often be higher. Additionally, you will not be able to buy a new policy if you are not insurable. It may be costly to replace your current policy, as you often encounter up-front costs and fees when purchasing new life insurance.

A new policy contains a two-year contestable clause, which means that the insurance company can refuse a death claim if it is the result of a suicide or if there is material misrepresentation on the application.

What about your existing policy?

If you do decide to replace your life insurance policy, do not cancel it until you have received the new one. You then have a minimum period to review your new policy and decide if it is what you wanted. For more information, or if you are considering a policy replacement, contact the Lafayette Life Conservation Department at 1-800-443-8793, extension 4933.

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