Tips When Replacing Your Life Insurance

Because life insurance agents are normally compensated with commissions, there are some bad apples out there that will sell anything to make a buck.  Even if you have a good life insurance plan in place, they may recommend cancelling it and replacing it so they can sell you a new policy.  Before you cancel or replace an existing life insurance policy, ask yourself…

  • Is the new recommendation comparable to the existing policy?

–          Permanent life insurance policies may have premiums guaranteed to never increase.  But the premium for this type of policy is higher than a term policy.  But the term policy premium will increase on renewal as you get older and get much more expensive than the permanent life insurance.

  • Will cancelling the existing life insurance policy have a tax consequence?

–          Many policies have valuable tax benefits.  If you’re advised to cancel a policy that has built up a cash value, then be sure to find out what the income tax may be on the proceeds prior to cancelling.

  • Does the life insurance coverage on the new plan expire at any time? When?

–           Many term plans expire when the insured reaches age 85. The claim probability is much higher at this age, and new coverage will either be unavailable or too expensive.

  • Are there any fees to cancel or replace the existing life insurance?

–          Many permanent life insurance policies (i.e. Whole Life, Universal Life) have surrender charges.  This could cost thousands of dollars if you cancel your policy, especially in the first 10 years of the policy.

  • Can the existing policy be modified to meet your needs, rather than replacing it altogether?

–           Many policies allow you to reduce your coverage and/or add a rider to meet your new insurance requirements.  If you can modify you existing policy you can also avoid have to go through medical underwriting again.

  • Are there any circumstances where the new policy would not pay a death benefit?

–          Nearly all life insurance policies will have a two-year suicide and incontestability clause. This means the insurance company will not pay a claim if the insured commits suicide within the first 2 years of the policy.  And the insurance company reserves the right to review the application for “material errors” which would affect insurability and therefore a claim payment within the first 2 years.  They may reduce or deny a claim.  For a claim to be completely denied there would usually have to be “fraudulent misrepresentation”.

Sometimes replacing an existing life insurance policy makes sense and is prudent.  For example, when you’re near the end of your policy’s term and still need coverage, then you may consider replacing it early to lock in lower rates, rather than waiting until you’re older and rates have increased.

NOTE:  A life insurance agent must complete a “Life Insurance Replacement Disclosure Form” with anyone who is replacing a life insurance policy.  This form protects you from bogus advice and sneaky advisors.  Be sure you are given a copy of the completed form and if you’re unsure about things, have another advisor look it over for a second opinion.

Feel free to contact us if you would like a review of your insurance portfolio and your life insurance needs.  We can get multiple quotes from the top insurers in Canada and send them to you.  We never add pressure and are happy to take all the time you need, when you’re ready to move forward.

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