Top 5 Reasons to Keep Your Life Insurance Policy
Let’s look into why replacement might be a bad idea. Here are 5 reasons to keep your life insurance policy:
1. Contestable Period
When you purchase a new policy, a new life insurance contestability period begins. This means that on average, a new 2 year waiting period begins for the policy’s suicide clause or other causes of death where insurer may challenge the death benefit.
2. Favorable Provisions
Your existing life insurance policy may have some great policy provisions that the new policy may lack. For example, maybe your original policy had a better guaranteed interest rate on policy cash value loans. Perhaps your old policy included some life insurance riders that you would have to pay extra for with the new policy.
3. First Year Charges
You will be subjected to new 1st year expense charges when you replace a life insurance policy. These first year charges are things such as underwriting, agent commission, and issuing the new life insurance policy.
4. Worsening Health Status
It’s more than likely that a new life insurance policy will be more expensive if your health has deteriorated or some other risk has occurred. If your health has worsened since you bought your original policy, you can expect a higher rate. Have you gained weight? Did you start taking any medications or use tobacco? These are all common situations that may make replacing life insurance a bad idea.
5. Section 1035 Qualification
Do you have a whole, variable or universal life insurance policy? A policy with cash value? You shouldn’t replace if your existing life insurance policy can’t qualify for the Section 1035 tax free exchange of the Internal Revenue Code. An example would be if you had an outstanding policy loan, it could be hard to affect the tax-free exchange. You don’t want to have any issues with the IRS when tax season rolls around. You want your cash value to stay tax exempt. In order for you to accomplish this, you’ll need to transfer ownership of the original policy to the replacement policy. This is the “exchange”. This is very important to understand and you run the risk of losing some cash value from your original policy if done incorrectly.
How do I replace my life insurance policy?
Now you know the advantages and disadvantages of replacing life insurance. If you’re ready to move forward and replace your original policy- there are a few steps you need to take.
Use an independent life insurance broker like Life Insurance Blog. They’ll be able to shop your life insurance policy from multiple carriers and find the best deal that you can qualify for.
During the application process, you’ll be asked if you’re going to replace an existing life insurance policy. Don’t be concerned or worried that this will cause any problems. The life insurance industry wants to protect you and other consumer from unethical agents who are using insurance twisting and churning.
3. Don’t Cancel Your Old Policy- Yet
Make sure you are approved and have your new life insurance policy in force before you cancel your original policy. This will also give you a little time to review the new policy and be certain that it meets your goals.