Replacing an Existing Life Insurance Policy

Replacing an Existing Life Insurance Policy
by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

Replacing a life insurance policy can be costly and complex. It is a decision that policyholders should carefully evaluate to identify the costs and pros and cons of replacing a policy.


Once the decision to replace is made, the policyholder can anticipate paperwork concerning the act of replacing. This article will identify who wants to know about the act of replacement and why.


When an applicant applies for life insurance, the applicant can expect to be required to answer three questions:


  • Does the applicant have an existing life insurance policy?
  • If so, what are the issuing company and the policy number?
  • If so, will the new policy be used to replace the existing policy?


The questions are required by state insurance regulators. They are asked to avoid life insurance agents from ‘churning’ accounts. They are also used to ensure that the applicant is aware of any surrender charges he/she will incur, possible tax consequences, that the contestability period resets with the issuance of a new policy, and other factors.


Life insurance companies want to know the total amount to be paid out upon the applicant’s death. They do not want to permit someone to become over-insured thereby creating an economic incentive to prematurely terminate their life. The new insurance company also wants to know that the applicant can afford multiple policies. Insurance companies invest considerable sums in underwriting, commissions, and other policy initiation costs. They want to know that the applicant has the means to continue paying for the new policy.


Failure of the applicant to provide accurate information can result in policy cancellation that will deny benefits to your beneficiaries.


Here are a few potential drawbacks to replacing your life insurance policy:


    • The premium for the new policy will probably be higher since you’re now older than you were when you bought the original policy.
    • The premium for the new policy will also be higher if you are in poorer health than you were when you bought the original policy.
    • The contestable and the suicide provisions will start over again in the new policy.
    • The initial costs for cash value policies are charged against the cash value in the earlier years, so you will sustain these costs again with a new policy.
    • You may incur surrender charges if you surrender your existing policy during the surrender period.

Here are a few potential benefits to replacing your life insurance policy:

  • There are new insurance products available at lower costs due to updated mortality tables that reflect longer life expectancies.
  • Many of these new products offer better guarantees than older products.
  • You can roll your existing cash value into a guaranteed policy to possibly get more insurance coverage.
  • If you have stopped smoking or if your health has improved since you took out your existing policy, you could get a new policy with lower premiums.


Talk to your life insurance company about these and other issues before deciding whether or not to replace your existing policy. They might be able to suggest changes to your existing policy that make more sense than replacing the policy.


Your existing policies “Definition of Replacement” will explain in detail exactly what constitutes a replacement. If you do decide to replace your policy, you will receive an “Important Notice Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts” and a “Disclosure Statement” when you apply for a new policy. Read these documents carefully before making a final decision.


CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.

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