Considerations When Replacing Life Insurance

There are many factors to consider before replacing any insurance policy. Before you even consider replacement you should consider your current state of health. If you are not in reasonably good health, replacement is probably not a financially viable option. Also, when replacing life insurance, you should always make sure the company you are switching to has good financial ratings.

Be aware that, depending on the type of life policy you are replacing, different concerns can arise. Replacing term life with term life does not usually generate many concerns. Even replacing term with cash value life insurance causes few concerns, as long as you understand the cash value policy you are purchasing. However, there is tremendous potential for being misled when replacing cash value life insurance with term insurance.

Comparing term and cash value insurance is like comparing apples and oranges. The term insurance will be frequently less costly than the existing cash value life insurance policies. However, the existing cash value life insurance is probably building up cash values on a tax deferred basis, while the term insurance builds no cash values. Any fair comparison requires an analysis of how much cash value the extra premium generates over time. One last caveat! Make sure you do not incur a significant tax liability when replacing a cash value policy. Dropping an existing cash value life insurance policy with a positive basis (cash value in excess of paid premiums) could create income taxes.

Replacing one cash value policy with another is also fraught with potential problems. While sometimes justified (see advantages), an unscrupulous insurance agent can easily lead you astray in this area. When replacing a cash value life insurance policy with another, there are always acquisition costs that lower your cash surrender value. The new insurance company must pay commissions, the cost of medical exams, and underwriting expenses in order to acquire your business. These costs lead to lower cash value in the short run when one cash value policy is replaced with another. You must be confident that the long term gain can justify this short run decrease.

Being confident about the long term performance of a cash value life insurance policy based on a policy illustration is often difficult. If the new insurance company is overly optimistic in projecting interest rates, mortality experience, or other cost factors, you may well not receive the advantages being projected to you in the illustration. Remember that using only sales illustrations is not a good way to compare insurance policies. Because of what an illustration does NOT say, you can be easily fooled.