If you’re considering changing your life insurance, get the facts first. The process is not complicated, but there are pros and cons and best practices for a seamless transition. Knowing what to expect and the processes involved will save you from nasty surprises.
In this post, we’ll look at:
- Reasons you may want to change your policy;
- What you should bear in mind before you do;
- And how you can tackle the application process, minus the headache.
I | Reasons to Change Your Life Insurance Policy
Every insurance policy you sign centers around one thing—your present needs. Those needs change over time and an effective policy changes with them.
However, it’s not an automatic process. Your insurer won’t call you at the end of each month or quarter asking for life updates. The initiative is up to you. Review your current life policy at least once a year.
Always make sure you have adequate protection before disaster strikes.
Besides finding cheaper premium payments, here are some reasons it may be time to change your life insurance policy.
Home/Life Reasons
- Change in marital status if you get married or file for a divorce;
- When your family grows and changes with the birth or adoption of a child or grandchild;
- Change in employment (job change, promotion, increased annual income, impending retirement);
- You want additional life insurance to supplement an employer-sponsored life insurance plan;
- Changes in your health or that of your spouse or partner;
- Becoming a guardian for a close relative who requires long-term care;
- Your child finishes college;
- You’re no longer responsible for any dependents and want to save money.
Financial Reasons
- Additional tax advantages;
- Purchasing or refinancing your home;
- Receiving an inheritance;
- You start or sell a business;
- You sign a business partnership;
- Taking out or co-signing a big loan;
- You want to change your policy type as part of your financial planning;
- You’re at the end of your term life insurance;
- Taking over the estate of an ill or aging loved one.
II | Things to Consider Before Changing Your Life Insurance Policy
1. You may lose some of your initial advantages.
The younger and healthier you are, the cheaper your life policy. That is the general rule, as those two criteria mean you’re low risk. Low risk always equals lower premiums because insurance companies feel safer investing in you.
If you stick with your insurer for an upgrade, you might not lose negotiating ground. However, if you move to a new insurance company, you start from scratch. Starting from scratch means new paperwork and medical. The terms and rate of your new policy depend on your age at the time of the switch, your health status, and the new company’s scoring criteria.
2. Your new life insurance medical exam might not weigh in your favor.
When you took out for your first life policy, you underwent a medical and “passed.” Losing the advantages of age and health opens up some significant cons.
- You may no longer be eligible for a new policy;
- Added restrictions because you’ve become a high-risk customer;
- Your new life insurance premiums might be higher than your current life insurance.
If you’re considering skipping any policy that requires a health check, it won’t do you much good. Insurers still take into consideration the possible risks of providing coverage. But without conclusive evidence, they’ll ballpark your monthly premiums and always err on the side of “expensive.”
Note: Redoing your medical exam can also work in your favor if you’ve quit smoking, lost weight, or made any other relevant health-related changes.
3. A new contestable period applies.
Standard life insurance policies come with a contestability clause. It states that your death benefits can be denied or contested in the first two years of your new policy. If your current policy is older than two years, you’re also losing this advantage.
4. Surrender charges may apply.
If you invested in an annuity contract, there is a penalty for early withdrawals or the contract’s cancellation. This penalty takes the form of a surrender fee. The contract’s age determines how much you pay your insurance company for this charge—the older the agreement, the lower the percentage.
Life Insurers use this fee to discourage early withdrawals and to recoup expenses from commissions.
Sometimes, you can avoid the surrender fee if you notify your insurer before your cancellation. Speak with your agent about the percentage owed if you’re an annuity buyer and the best waiting period before cancellation.
III | Changing Your Life Insurance Policy
Now that you understand what you’re in for, let’s go through making the change happen.
1. Consider staying with your current insurer.
Unless there are adverse reasons you want to change your insurance provider, consider them your first choice. Speak with your insurance agent about possible upgrades and conversion to a different policy.
Have a chat about the types of policies available:
- Term Policy
- Whole Life
- Permanent life insurance options like Universal Life
Sometimes conversions don’t require medical exams, and you can avoid the contestability period.
If you can’t convert your policy, buying supplemental life insurance is another option. Whatever decision you make hinges on your needs and if your current provider can satisfy them at a reasonable price.
If none of the additional options work, look into other companies for the coverage level you require that meets your budget. There’s a plan out there for everyone.
2. Learn the company-specific steps for changing your insurance provider.
Should you decide it best to cut ties with your present carrier, inquire about the exiting process and any monetary penalties for terminating your contract. Surrender fees may apply, but you might be able to hold out for a certain grace period to avoid penalties.
If you included a “return on premium” rider in your original policy, ask about the refund due and how long it’ll take to receive the check. You can use this refund to jumpstart your new policy if upfront costs are involved.
3. Research other viable options and seek professional advice.
Shopping around will help you learn your policy options. Insurers provide incentives for people who meet specific criteria, and restrictions will vary.
Hopefully, after consulting with your present agent, you clearly understand what you want from your coverage and the limits. Take this information and start your comparison with other companies. Ask for insurance quotes and if you qualify for added benefits.
Explain to the new agent you’re dealing with that you’re seeking replacement coverage. A trained professional can help you find gaps in your insurance coverage.
IV | Protect Yourself
Commissions and interest pay billions to insurance companies and agents. Be careful with the agreements you sign and the people you work with, and always safeguard your investments.
- Never sign incomplete documents or any you do not understand. If the provider cannot adequately explain the policy’s terms, or dismiss your questions and concerns, walk away.
- All that glitters isn’t gold. Some agents might try to convince you of the advantages of using the entirety of your current policy‘s cash value to pay the premiums of another. Refuse this advice. Life policies do have savings potential, but sometimes the returns are exaggerated.
- Know the difference between “cheap” and “affordable.” When we offer advice on how to get “cheaper” insurance, we mean “reasonably priced” or “affordable. “Cheap insurance” comes at a minimal cost with minimal benefits.
- Understand all the provisions of your new policy. Check the fine print for penalties and the tax consequences of changing your policy or switching to a new insurance carrier.
Conclusion
Changing your life insurance can be simple if you have the correct information.
- Check with your insurance carrier about an upgrade on your current coverage or possible conversion to another type of policy. This is your best bet against doing a medical exam and avoiding another contestability period.
- If you decide to move on to another insurer, ask about the separation process and what penalties you may face for early cancellations. Ask about the refunds entitled to you.
- Research alternative options, bearing in mind the level of coverage you need. Collect quotes from reputable companies and choose which one best suits you.
