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Life Insurance: Providing Security for Your Survivors

Replacing Your Policy

Replacing your life insurance policy is generally not a good idea for several reasons:

  1. If you've had a cash-value policy for more than three years, you've already gotten the up-front loads out of the way, and your policy will start to accumulate value. The sales commissions alone can equal the first year's premium.
  2. The cost of insurance is higher the older you get. Taking out a new policy usually means higher premium payments.
  3. Life insurance policies have an incontestability clause and a suicide clause. When a policy is issued, there is a two-year contestability period. If you die within the first two years of the new policy, the insurance company can deny a claim if there were material representations on the application which would have made a difference in the coverage issued. After two years from the date of issue, a claim cannot be denied, except in cases of fraud.

The suicide clause states no proceeds will be paid if the insured commits suicide within two years of the date of issue. If you replace your policy, you are subject to new incontestability and suicide periods.

When should you consider switching your policy? If the new policy's benefits outweigh keeping the old policy. Here are some situations when it might be worthwhile:

  1. Total cost. If the new policy will cost you considerably less than your existing policy, it may make sense to replace the existing policy. You may have several very small policies. The premium for the new coverage may also have greater cash value potential. Be careful, as life insurance illustrations can be misleading (see the section Shopping for an Individual Policy).
  2. Flexibility. The new policy may be better suited to your cash flow. Universal life allows you the opportunity to skip premiums rather than borrowing from the policy, within certain guidelines.
  3. Financial Strength. Your life insurance company's ratings may have dropped to the extent that their claims-paying ability is questionable.
  4. Heavily Borrowed. You have an old whole life policy that you've stripped bare. The interest and future premiums make it too expensive to keep the remaining death benefit.

If you're considering replacing your policy, make sure you do all of the following:

  1. Be skeptical. Make sure you fully understand the advantages of replacing your existing policy. What will the new policy accomplish? Is it consistent with your current and future needs? Is there a downside?
  2. If a new agent has approached you about switching policies, and you feel comfortable with your present agent, let your existing agent know that you are considering replacing your policy. Ask your agent if he or she can show you how you can alter or modify your existing policy to better meet your needs, or ask him or her why you should keep it as is.
  3. If you complete an application for the new policy, your agent (old or new) should be asking you to sign replacement papers. Replacement papers are required in most states. (If the agent skips this process, contact your State Insurance Department to see if it is required by law.) This provides you with a side-by-side comparison of the two policies, it informs the new company that you are replacing your existing policy, and it requires the new company to inform your present insurer that you have applied for a new policy. While it gives your present insurer an opportunity to preserve the policy, it mainly protects you from fraudulent sales practices. Make sure you sign the forms once they are completed and keep a copy for your records.
  4. If you are switching from one cash-value policy to another, have the new company do a "Section 1035 exchange." The existing cash value is directly transferred to the new policy and you maintain your basis in the old policy. This is important if you pull money out of your policy in the future because it can reduce your potential tax liability.
  5. NEVER CANCEL YOUR OLD POLICY UNTIL THE NEW POLICY IS IN FORCE. A life insurance policy is in force once the policy is issued and the first premium is paid.

Does It Make Sense to Switch?

Old Policy You Will Be Switching From:

New Policy Types and Considerations:




Universal Life (UL)

Variable Universal Life


If your policy is several years old and/or you need more insurance

Rates today are lower; it pays to have one policy

Only if you have enough money after funding your retirement plans

If you plan on keeping it more than 15 years

You want a level premium for life

You need insurance during retirement

You need insurance during retirement, or

You plan on keeping the same death benefit more than 20 years

You're willing to pay more to have a level premium, and

The cash value can be used to keep the premiums low

Your life insurance needs are minimal or

You are using it to supplement your basic insurance needs

You have fully funded your retirement plans

You believe that you need permanent insurance

You're willing to assume investment risk and a variable death benefit

You are committed to holding on to the policy for at least 20 years


If you need substantially more insurance

If the policy is several years old, consider using the dividends to reduce the premium and buy additional term insurance


You have an old whole life policy with high premiums

Consider a combined whole/term life policy


You want a lower level premium

You want flexibility to skip contributions

Your policy is old, dividends are small, and increases in cash value are minimal

You're more than 20 years from retirement

You're fully funding your retirement plans

You're willing to accept investment risk

You have enough term insurance and a whole life policy that you're planning on keeping in retirement, consider switching the whole life for a variable policy

Universal Life (UL)

You need more insurance

You can't afford to keep it and buy more term

You're not planning on needing insurance during retirement

You want guaranteed level premiums

CAUTION: Don't switch to another universal life policy just because the interest rate is higher; companies offer different interest rates depending on the internal expenses of the contract, e.g., some states apply premium taxes

You're more than 20 years from retirement

You're fully funding your retirement plans

You're willing to accept more investment risk

You have enough term insurance and a UL policy for retirement, consider switching the UL for a variable policy

Variable Life

You need more insurance

You only plan to hold on to it a few years

You want a guaranteed premium and a guaranteed death benefit

You have a low risk tolerance

You want to reduce your investment risk

You prefer a fixed rate of return that is marked to current interest rates

Your sub account (investment) choices are limited

The funds are performing poorly


What If You Can No Longer Afford to Pay Your Premiums?

If you're having trouble paying your life insurance premiums, discuss the following options with your insurance agent to help you make the best decision.

If you have term insurance, try to find a similar policy with lower premiums. If you have a policy that is more than a few years old, compare your existing policy to what's available on the market today.

If you have a traditional form of permanent life insurance such as whole life, you have certain non forfeiture provisions that prevent you from losing your cash value and/or death benefit. You have three options: 1) surrender your policy and receive the cash value 2) use your cash value to buy extended term insurance, or 3) convert your policy to a reduced paid-up policy. Your policy contains a table of guaranteed non forfeiture values.

  1. Cash Surrender Value. This is the amount you get when you surrender the policy. Your policy has a guaranteed cash value which starts to build, typically in its third year. The older your policy, the higher its cash surrender value. If you take the cash, the death benefit goes away. If you want to keep the same amount of insurance, consider option 2.
  2. Extended Term Insurance. If you fail to pay your premium beyond the grace period (30 or 31 days, but in reality companies usually wait until the second month), and you did not elect the automatic premium loan, the company will automatically use the cash value to buy you term insurance that equals the amount of insurance in your present policy. The term insurance will remain in-force as long as there is enough cash value to support it. Say your policy is ten years old. Your cash value may buy you extended term insurance for ten more years. If you don't need as much insurance, consider option 3.
  3. Reduced Paid-Up Insurance. The cash value in your policy will buy you a death benefit based on a single premium. This substantially reduces the face amount of the policy, but keeps the same policy intact. While no further premiums are required, the policy will continue to increase in cash value and pay dividends, at a lesser amount. If you've only had the policy a few years, the reduced face amount is probably not worth keeping; avoid this option.

If you've had a universal life or variable universal life policy for several years and the interest rate has well exceeded the guaranteed interest rate, or the sub accounts have performed well, you may be able to pay the minimum premium or skip a scheduled contribution and keep the policy in-force for a period of time until you can resume your regularly scheduled contributions. You may even have sufficient cash value to keep the policy in force without putting in any more money. Have your agent run an in-force ledger to determine how well your policy will hold up without future premium payments under current rates. If 1) the policy is going to lapse sooner than you'd like 2) you don't think that you'll be able to resume normal payments, or 3) you don't want to reduce the death benefit, then you should consider purchasing term insurance.

SUGGESTION: Discuss your options with your life insurance agent. Speak to another agent and get a second opinion. You can also contact some of the insurance services mentioned in this Learning Center. Don't drop your coverage until you get enough facts to make a well-informed decision.

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