Things to Consider when Replacing a Life Insurance Policy
Over the past few posts, I’ve been talking a lot about insurance, specifically life insurance. In the last two posts, I’ve discussed the process we used to buy new life insurance policies and then discussed why we decided to cash in our variable adjustable life policies and replace them with term policies . Though I recommend buying term life insurance, I would be remiss to not discuss some of the concerns to be aware of if you decide to replace your current policy. (I would also be remiss to have any more posts concerning life insurance in the near future!)
Be cautious when replacing life insurance coverage
If you currently have a variable or whole life insurance policy (let’s call it "cash value" today), I urge you to be very cautious when replacing your existing coverage.
The first and most important rule when replacing your current coverage, term or cash value, is do not cancel your current policy until you are sure your new policy is in effect . This is absolutely critical – you can’t afford to have something untoward happen after you’ve canceled your policy but before your new one is in effect. Or, what if you cancel your current policy and your application for new coverage is rejected? For someone who needs life insurance, expensive coverage is much better than no coverage at all! Please, proceed slowly and cautiously when doing this.
Your current policy may have surrender charges
If you haven’t had your cash value coverage very long, you might have to pay a surrender charge to free your money. Yes, you may have to pay the insurance company more of your money to take out your money. Of course, since almost 100% of the premiums go to the insurance company the first year or so, you might not have much money to take out anyway.
Make sure a new policy is cost-effective
On the other hand, if you’ve had your policy a long time, even a new term policy might be just as expensive as your current policy. This is especially true if you’ve developed health issues or started smoking (or took up sky-diving) in the meantime.
But on the other hand (that’s 3 now?), insurance rates have gone down quite a bit in the last few years, so it might be worth it to check out the current rates. You might be able to save a significant amount of money, especially if you’ve improved your health by quitting smoking or losing weight (or stopped sky-diving)
Two miscellaneous words of caution
Remember that most insurance policies have an exclusion period during which they won’t pay the death benefit under certain circumstances. For instance, on my new policy, they will not pay the death benefit if I commit suicide within the first two years. Also, if they determine that I lied about something on my application, they won’t pay out if I die within the first two years and the thing I lied about contributes to my demise. (don’t lie and don’t commit suicide and you can ignore this warning – you know, that’s just two real good pieces of advice for everyday living right there)
Also, when choosing a replacement term policy, remember that the insurance company still has to be around in 25 years or whatever to pay out the death benefit if you die while you have the policy. So, don’t scrimp too much and get a unstable company just to save a little money each year. (Of course, in the current economic climate it is very difficult to determine which companies, if any, are stable…but do your best) Check out ambest.com to get the current ratings of insurance companies – you do have to register to see their ratings but registration is free.
Talk to someone
If you are considering replacing your cash value policy, my advice would be to talk to a professional or someone with a lot of experience in this area to see what makes sense for you. Of course, talk to someone who will have your best interests in mind and not just his/her commission check. Whatever you do, don’t let him/her churn you into another expensive cash value policy that will trigger another set of surrender charges and crazy first year fees.
So, check out rates on insweb.com or selectquote.com and see if replacing your current coverage is worth it, then go through the entire process before doing anything with your current policy .
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Hey, interesting post there. When I talk to people about life insurance I will always say to them that they should get as much information about their current polciy (if they have one) , and information on the policy they are looking into. If they’re unsure about either of them, then I advise them to go and do some research on the web.
It really doesn’t surprise me how little people care about their polices and don’t keep uptodate with them, just astonishing.