What you need to know about life insurance replacement

A life event that triggers the purchase of life insurance is usually a marriage, childbirth, job promotion, or home purchase. It is common for people to make changes to their life insurance coverage several times, sometimes as many as eight times. It may not be necessary to add coverage. However, depending on your situation, it might be necessary for you to replace an existing policy. Some people will be persuaded to replace their life insurance policy, even if it is for the benefit of the life agent. If you’re ever advised to replace your life insurance policy by another, be aware that there are strict regulations to protect you from such replacements.

The Problem with Replacements

You’ve probably exchanged or replaced your home and auto insurance several times. You will need to be careful when replacing a life policy. It can cause problems with your coverage, future costs, and could even lead to you losing your insurance. While there are some situations where replacing a life policy can improve coverage and reduce premium costs, it is not always possible. You can still increase your risk by changing life insurance policies, but there are certain provisions that all life insurance contracts have.

A contestability period is a provision in all life insurance policies that allows the insurer to contest any death benefit claim made by the insured based upon misrepresentations. A misrepresentation can be made without mal intention in many cases. However, an insurer cannot deny a claim for merely because of an error. When a policy has been replaced by a new one the contestability period is reset. The suicide exclusion is also included in every contract. This gives the insurer the ability to deny a claim for death caused by suicide within two years.

Replacing a damaged item can be costly

The policyholder often suffers from a replacement for cash value policies in life insurance. A policy that has surrender fees (fees charged when cash value is surrendered within a set period of time) can cause policyholders to lose a significant amount of their cash value when they are transferred to a new policy. If surrender fees apply, it’s not a good idea to replace a cash values policy with another.

A significant amount of life insurance costs are also paid early in the contract. So, when you start new policies, you are actually paying for the costs that were already covered under your existing policy. It can take many years for a policy to grow in cash value. If a new policy is started, it will be less efficient.

It should be in Your Best Interest

The state insurance department is most concerned about the small proportion of life insurance agents who engages in the illegal practice “churning”, which is when a policyholder gets persuaded by an agent to replace a policy to make more commissions. A valid reason must be provided, supported by analysis, to show how the insured’s financial situation will improve. Each replacement must pass a mandatory review, and they must meet certain criteria before being approved.

Agents are required to give you a copy of the policy and the risks if they recommend you replace your life insurance policy. It is important to carefully read the document and ask many questions before you accept a replacement. It is important to show that the replacement will improve your financial situation. A second opinion from an independent insurance professional is available if there are any questions.


*This content has been compiled from reliable sources. The information presented is not meant to be used for tax or legal advice. Individuals are encouraged and encouraged to seek the advice of their tax or legal counsel. Individuals involved in estate planning should work with an estate team that includes their tax and legal counsel. Our information and opinions do not constitute a recommendation of any specific investment or the sale or purchase any securities. Diversification and asset allocation do not guarantee profits or protect against losses in declining markets. Advisor Websites produced this information to offer information on a topic of potential interest.

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