As I was filling out an obnoxiously lengthy New York life insurance replacement form yesterday it occurred to me that replacement, the idea of getting rid of a current policy and replacing it with a new policy has kind of gotten one of those back alley bad raps. State insurance commissions, albeit with an abundance of caution because of unscrupulous life insurance agents, well, heck, they make you fill out replacement forms stating the you understand the possible consequences of replacement even when you aren’t replacing. In some states if you are replacing the company you are buying from has to let the company you are replacing know what the plan is.
So why do people replace one policy with another? Probably the most common reason is that by replacing they can get a better rate for the same coverage. In the case of the NY forms I just filled out (6 pages) it was simply because the person had $100,000 in force and wanted $250,000. He also had a 20 year term and wanted a 30 year term. So the state is essentially asking the client if they really thought it through. Why not buy another $150,000 of 30 year term instead of replacing and buying $250,000? The state knows the answer but they still ask 40 different ways why you chose the less expensive way to get to where you wanted to go. Anyone in life insurance know that having a $100,000 policy and buying an additional $150,000 is going to cost more than sacking the $100,000 and replacing it with $250,000. And in this case the piece meal method of getting to $250,000 would still leave a shorter term than desired on the $100,000. No sense at all.
Companies and state insurance agencies go to great lengths to make sure you understand the dangers of replacing a policy that has already out lived the life insurance 2 year contestability period with a new policy with a new 2 year contestability. They would have you believe that there is horrendous danger in “that two years” where in all likelihood, according to them your beneficiaries wouldn’t receive a death benefit. In truth what they are saying is that if you lied on the last life insurance application and have made it to the sort of safe harbor beyond two years, and you intend to lie again when you apply for a new policy to replace it, then you might want to stick with what you have and avoid replacement because liars are at risk in the first two years. Let me reiterate from past years of debunking this myth, “successfully contested policies are rare” and only successfully contested when when significant material misrepresentation appears in the application or interviews done to acquire life insurance.
So, when should you replace a life insurance policy? Let’s start with a good rule of thumb. Never cancel your current life insurance until your new policy is approved and in force. Having said that, replacement is a great tool that consumers have to improve their position with their life insurance, ie, getting more coverage or a longer term for the same price, improving your life insurance position because some event, cancer, dui, etc has passed a date where it is relevant to underwriting, or the company your current policy is with does something stupid with their conversion option that doesn’t work with your long term goals.
If you have a cash value policy that has taken a turn for the graveyard of cash value life insurance, before the cash goes away you really should look at a replacement. Another rule of thumb. When a cash value policy begins to fail or falter, it will eventually fail completely leaving you with no life insurance and no cash value for all the money you’ve put into it.
Bottom line. Never be concerned about looking into the up and down sides of replacing your current life insurance. I’ve had customers that, had they not looked into the possibilities, would have spent tens and even hundreds of thousands more in life insurance premium than they needed to. It’s worth a look. If you have questions or would like to find out more about a possible replacement, call or email me directly. My name is Ed Hinerman. Let’s talk.