Maximizing Life Insurance Returns: Strategies For Better Financial Security

Life insurance is a crucial step in planning for the future, but as time passes, you may want to re-evaluate your policy. You can transfer your life insurance policy to another company, but there are rules and regulations to follow. It's important to be aware of the potential pitfalls, such as a new medical exam, which could lead to a higher premium. You may also face a new contestability period and have to pay upfront fees again. However, transferring your policy can have benefits, including better terms and benefits, competitive premiums, improved customer service, and policy customisation.

Pros and cons of switching life insurance providers

There are several reasons why you may want to switch life insurance providers. Perhaps your needs have changed, your current level of coverage is no longer suitable, you're changing jobs, your policy is ending, your finances have changed, or your health has improved. Whatever the reason, switching life insurance providers can be beneficial, but there are also some potential drawbacks. Here are some pros and cons to consider:

Pros of switching life insurance providers:

• You can find a policy that better suits your current needs and circumstances. For example, if your children have grown up and no longer require financial support, you may want to adjust your death benefit accordingly.
• You may be able to find cheaper coverage or a policy with better benefits.
• If your health has improved since you took out your original policy (e.g., if you've quit smoking or lost weight), you may qualify for a better premium with a new provider.
• If you're changing jobs, switching life insurance providers can help ensure you have the coverage you need, especially if your new job doesn't offer the same group life insurance benefits as your previous employer.

Cons of switching life insurance providers:

• You may have to undergo a new medical exam with the new provider, which could lead to a higher premium if your health has deteriorated or if new health issues have arisen.
• You will be subject to a new two-year contestability period, during which the insurance company has the right to investigate a claim before paying the beneficiary if the policyholder passes away within the first two years of purchasing the policy.
• You will likely have to pay upfront fees again, which can be costly.
• There may be potential tax burdens associated with changing your life insurance policy, such as gift taxes if you transfer ownership of the policy to another party.
• Cancelling your permanent life insurance policy may incur surrender charges.
• Premiums on your new policy may be higher, especially if you've aged or your health has changed since taking out your original policy.
• It can be a complicated process, especially if you're moving from one whole life policy to another, as you'll need to ensure any accrued cash value is moved before cancelling your existing policy.

Before switching life insurance providers, it's essential to carefully consider your needs and research potential new providers to ensure they align with your goals and values. It's also a good idea to speak to your current provider to see if they can offer a policy that meets your changing needs, as they may be willing to make adjustments to retain you as a customer.

Reasons to exchange an existing policy

There are several reasons why a policyholder might want to exchange their existing life insurance policy for a new one. Here are some of the most common reasons:

• Changing needs: Your circumstances may have changed since you took out your original policy. For example, your children may have grown up and no longer need financial support, or you may have gotten divorced. In such cases, you may want to adjust your death benefit or switch to a different type of policy.
• Level of coverage: Your current level of coverage may no longer be suitable for your needs. You may want to switch from a term policy to whole life insurance for permanent coverage, or vice versa.
• Employment changes: If you change jobs, you may need to consider the group life insurance benefits offered by your new employer and whether you need to supplement that coverage with a privately owned policy.
• Policy ending: If your term policy is coming to an end, you may still need some form of coverage. In this case, you may want to get a new policy with a lower death benefit or one that only covers final expenses.
• Financial changes: Your financial situation may have changed, and you may no longer be able to afford the premium payments on your current policy. Alternatively, you may have improved your financial situation and want to incorporate a cash value policy into your financial plan.
• Changes in your loved ones' finances: You may discover that your beneficiaries will have a greater or lesser financial need than you anticipated, leading you to want to adjust your death benefit amount.
• Improved health: If you have made positive changes to your health, such as quitting smoking or losing weight, you may qualify for a better premium on a new policy.
• Better terms and benefits: You may find that another insurer offers more favourable terms, enhanced features, or additional benefits that better match your current and future needs.
• Competitive premiums: You may be able to find a similar level of coverage at a lower premium with a different insurer.
• Improved customer service: If you are unhappy with the service or claims process of your current insurer, you may want to switch to a provider known for better customer support.
• Policy customization: Your current policy may not offer specific features or riders that you now feel are necessary. By switching to a new policy, you can find a more tailored solution.
• Relocation: If you move to a new area where your current insurer has limited coverage, you may need to switch to a different insurer to maintain adequate protection.
• Concerns about underwriting: If you are concerned about your current insurer's risk evaluation practices, you may want to consider portability to find an insurer with a more flexible approach.
• Policy conversion: If your existing policy lacks essential features, you may want to convert it to a different type of policy that better meets your needs.
• Improved mortality rates: Improvements in mortality rates across the general population may result in insurance coverage at a lower cost.
• Concerns about the original insurer: You may have concerns about the solvency of the insurance company that issued your original policy or the service provided by the investment professional or insurance agent who sold you the policy.
• More desirable features: A new life insurance policy may offer more desirable features or benefits that are not included in your current policy.

Reasons not to exchange an existing policy

There are several reasons why you might not want to exchange an existing life insurance policy for a new one. Here are some key considerations:

• Reduced cash value: Exchanging your policy could reduce the cash value built up in your original policy if a portion of the accumulated amount is applied to the new policy's first-year expenses, including commissions.
• Early surrender charges: Life insurance policies often include early surrender charges, which can reduce the amount of cash value available for the new policy. The new policy may also have its own surrender charge schedule, which could extend beyond that of the original policy.
• Higher premiums: Your health may have declined since purchasing your current policy, leading to higher premiums for the new policy.
• New contestability period: The new policy will typically have a new contestability period, which is a two-year period during which the insurance company can challenge a death claim based on misstatements in the application.
• Tax consequences: Surrendering an existing policy may result in unfavourable tax consequences, such as a potential tax on outstanding policy loans.
• Loss of existing benefits: Your current policy may have benefits that a new policy might not offer. Review your current policy thoroughly to understand the benefits you could lose.
• Increased costs: Exchanging your policy may result in new sales commissions, upfront fees, and other acquisition costs that you would need to consider.
• Performance of the new policy: A new policy's performance is not guaranteed, and past results do not always predict future performance accurately.
• Incontestability and suicide periods: These periods will usually start over with the new policy, rather than continuing from where the old policy left off.

Things to consider when switching life insurance

Switching life insurance policies can be daunting, but there are several things you can do to ensure a smooth transition and find the best coverage for your needs. Here are some essential factors to consider when making the switch:

Check for surrender charges:

If you're cancelling your permanent life insurance policy, be aware that you might be charged a surrender fee. While this amount typically decreases over the length of the policy, it's important to find out the exact charge before making any final decisions.

Pay attention to taxes:

Switching life insurance policies can have tax implications. Consult a financial expert or tax accountant to understand the potential tax consequences of dropping your old policy and taking on a new one.

Prepare for potential price increases:

Premiums on your new policy may be higher than your current rates, especially if you've aged or your health has changed. Be sure to factor this into your decision and budget accordingly.

Compare benefits:

Thoroughly review the benefits offered by potential new policies to ensure you aren't losing any essential coverage. Understand the trade-offs and determine if the new policy aligns with your current needs and long-term goals.

Consider changing your current policy first:

Before making a complete switch, explore the possibility of amending or adding to your current policy. Your insurer may be willing to make adjustments, such as switching from term to permanent coverage, to retain you as a customer.

Note the waiting period:

Most new policies have a waiting period before certain death benefits become effective. Be sure to factor this into your decision, especially if you're replacing an existing policy with a longer track record.

Understand the financial implications of cancelling your old policy:

When cancelling your current policy, be aware of any financial consequences, such as losing the money you've already paid into a permanent policy. It's generally advisable to have your new policy in place before terminating the old one to ensure continuous coverage.

Communicate with your current provider:

Your current insurance company may be open to drafting a new policy that better meets your needs. Discuss your options with an agent to see if they can offer a solution that aligns with your changing circumstances.

Review bundling discounts:

If you're switching insurance providers, be mindful of any bundling discounts you may be receiving. You might lose these discounts, which could impact the cost of other insurance policies you have, such as home or auto insurance. Consider whether you can move your other insurance policies to the new provider to take advantage of bundling discounts there.

By carefully considering these factors, you can make a well-informed decision about switching life insurance policies and ensure that you're getting the coverage that best suits your needs.

Tips for purchasing the right amount of coverage

When purchasing life insurance, it's important to get the right amount of coverage for your circumstances. Here are some tips to help you do that:

• Consider your beneficiaries' needs: Think about what you want the death benefit to be used for, whether it's to support your children, pay off your mortgage, or cover funeral costs. This will help you determine the amount of coverage you need.
• Calculate your income: Financial experts often recommend purchasing a policy that covers at least 10 times your annual income. However, you may need more or less depending on your personal circumstances.
• Factor in debt: Consider any debts that your family members may be responsible for after your death. This could include mortgages, student loans, car loans, or credit card debt. Make sure your policy includes enough coverage to pay these off.
• Think about final expenses: Funeral costs, estate taxes, and other end-of-life expenses should be factored into the amount of coverage you need.
• Weigh up your financial goals: If you want to use your life insurance policy to accumulate savings, you may want to opt for a whole or universal policy, which allows you to build cash value over time.
• Be mindful of your budget: A higher death benefit means higher premiums, so it's important to consider what you can afford. A financial advisor can help you decide what premium works best for your budget.
• Don't forget about riders: Riders are additional benefits that can be added to your policy to meet your specific needs. For example, a waiver of premium rider can protect you if you're unable to pay premiums due to illness or injury. Adding riders may increase your premiums, so consider this when determining the amount of coverage you need.

Frequently asked questions