Considerations for Replacing Your Permanent Life Insurance Policy

Life insurance is a competitive market, and for many people, life insurance is not a once-in-a-lifetime purchase. There are many factors and sales tools used to tempt a person to exchange or replace their existing permanent life insurance with a new policy. Understanding the facts about your current policy, and the risks involved in replacing it, can help you make an informed decision that fits your current and future insurance needs.

When faced with the decision of replacing your existing permanent life insurance coverage, be skeptical, and take the time to understand all of the advantages and disadvantages that come with this decision.

  • Interest Rates: Does the coverage have a guaranteed interest rate that the company cannot go below? Is the rate tied to investments that you must choose and manage, which can add to the risk of the policy? Illustrations can be complicated and confusing; does it look too good to be true?
  • Policy Fees and Expenses: Understand and compare policy fees, and expenses. Some companies have both current and guaranteed rates. This allows the company to increase other fees, which will affect policy performance.
  • Cost of Insurance: Life insurance premium rates are influenced by the insured’s age and health. The cost of insurance will most likely be higher on a new policy than on your existing policy, primarily because you are older and your health may have changed when the new coverage starts.
  • Surrender Charges: Your policy may still have surrender charges, or cancellation fees, which will reduce the amount of money that would be transferrable to the new company. Surrender charges are usually higher in the early policy years, which means that any new coverage will likely have a higher surrender charge than any existing coverage.
  • Contestability Period: Life insurance is often issued with a two-year contestability period. This means that during the first two years of the policy, a death claim may be denied if the applicant or insured left out or distorted information that was provided during the application process.
  • Taxation: When a life insurance policy is surrendered for cash, certain circumstances may cause the funds received to be subjected to state and/or federal income tax. A financial professional should be consulted to fully understand the tax implications.

Although replacing your existing permanent life insurance policy is rarely beneficial, the replacement may make sense if the cost, projected performance, and the benefits outweigh the disadvantages.   Knowing the facts, understanding your current and future life insurance needs, and thoroughly reviewing your options with your insurance advisor will help position you to make the best decision for your long-term financial goals.

Considerations for Replacing Your Permanent Life Insurance Policy (pdf)
Considerations for Replacing Your Permanent Life Insurance Policy (jpg)

This article is for general information and risk prevention only and should not be considered an offer of insurance or legal, financial, tax or other expert advice. The recommendations herein my help reduce, but are not guaranteed to eliminate, any or all losses. The information herein may be subject to, and is not a substitute for, any laws or regulations that may apply. This information is current as of its publication date and is subject to change. Some of the services referenced herein are provided by third parties wholly independent of Federated. Federated provides access to these services with the understanding that neither Federated nor its employees provide legal or other expert advice. All products and services not available in all states. Qualified counsel should be sought with questions specific to your circumstances. All rights reserved.

Published Date:November 17, 2020

Categories: It's Your Life