Before Replacing a Life Insurance Policy, Compare More Than the Premium

A lower illustrated premium or a new feature can make replacing life insurance look attractive. But replacement is not simply switching one monthly bill for another. It means ending, surrendering, borrowing from, or materially changing existing coverage in connection with buying a new policy.

The old policy may contain guarantees, pricing, conversion rights, accumulated value, or favorable underwriting that cannot be recovered once surrendered. The new policy may bring a new contestability period, new suicide provision period, acquisition costs, surrender charges, and different assumptions.

Do Not Cancel the Old Policy Too Early

Keep existing coverage in force until the new policy has been formally issued, delivered, reviewed, accepted, and confirmed active. An application, illustration, or preliminary quote is not the same as an active policy. Underwriting can change the price, coverage amount, or approval decision.

Compare Guaranteed Values

If either policy uses an illustration, separate guaranteed values from non-guaranteed values. An attractive projection does not guarantee future credited interest, dividends, policy charges, or cash value. Compare the same time periods and realistic premium assumptions.

Account for Surrender Charges and Loans

Permanent policies may have surrender charges, outstanding loans, or tax consequences. A loan can reduce cash value and the death benefit and may create tax issues if a policy ends with a gain. Request an in-force illustration and current policy statement before deciding.

A Practical Example

Suppose an owner has paid into a permanent policy for eight years and is shown a new policy with a lower initial premium. The new illustration may look better, but the old policy could have passed much of its surrender-charge period while the new policy starts a new schedule. If the new premium depends on non-guaranteed assumptions, the long-term result may be very different from the first-year comparison.

Questions Worth Asking

• What do I lose by giving up the current policy?
• Which values in each policy are guaranteed?
• Will contestability or suicide periods restart?
• Are there surrender charges or outstanding loans?
• Has my health changed since the original policy was issued?
• Can the existing policy be adjusted instead of replaced?
• When will the new coverage be unquestionably active?

The Bottom Line

Replacement can be appropriate, but only after a side-by-side review of the contracts, not just their starting premiums. Preserve the old coverage until the new policy is active and the free-look review is complete.

Source: NAIC Life Insurance and Annuities Replacement Model Regulation.