Life Insurance: Changing Policies Whenever You Want

Life insurance is a crucial aspect of financial planning, providing peace of mind and financial protection for individuals and their loved ones. However, life insurance policies are not one-size-fits-all, and it's essential to periodically review and adjust your coverage to align with life changes and evolving needs. The good news is that you can change your life insurance policy at any time. This flexibility allows you to adapt your coverage to significant life events, such as getting married, starting a family, purchasing a home, or experiencing changes in your health or financial situation.

Changing your type of coverage

Changing the type of coverage in your life insurance policy is possible, but there are some important things to consider. Firstly, understand why you want to switch. This could be due to a change in your life circumstances, such as a change in marital status, income, or health improvements.

Secondly, be aware that switching to a new provider will likely result in a new medical exam, which could lead to a higher premium. It is also important to note that there may be fees associated with cancelling your current policy and starting a new one, including upfront fees and potential tax consequences.

Thirdly, review the different types of policies available: term, whole life, or other permanent life policies. Term life insurance covers the policyholder for a set number of years, usually 10 to 30, while whole life insurance covers the policyholder for their lifetime, as long as premiums are paid, and offers a cash value component. Permanent life insurance policies, which include whole, universal, and variable life insurance products, also last for the duration of the policyholder's life and often include additional benefits like a cash value component.

Finally, speak with your current insurance provider to see if they can meet your changing needs. They may be able to convert, replace, or supplement your existing policy to achieve the desired coverage. If not, you can then explore alternative providers and policies. Remember to carefully review all options and seek advice from a trusted source, such as an accountant or financial planner, before making any final decisions.

Switching life insurance providers

Reasons for Switching:

There are several valid reasons why someone may want to switch their life insurance provider:

• Change in life circumstances: This could include changes in marital status, income, estate size, or the growth of children.
• Inadequate level of coverage: The current policy may not align with the individual's needs, prompting a switch to a different type of policy, such as term or whole life insurance.
• Employment changes: Switching jobs may lead to changes in group life insurance benefits, requiring adjustments to one's policy.
• Policy expiration: If a term policy is ending, an individual may seek alternative coverage options.
• Financial changes: This could involve changes in one's ability to pay premiums or a desire to incorporate a cash value policy.
• Beneficiary's financial changes: Adjustments to the death benefit amount may be necessary if the beneficiary's financial situation has changed.
• Improved health: Positive changes in health may qualify an individual for a better premium.

Steps to Switching:

When considering a switch, here are the key steps to follow:

• Determine the type of life insurance desired: Before cancelling the current policy, decide whether a term or permanent life insurance policy is preferred.
• Assess the desired coverage amount: Consider the intended purpose of the death benefit payout and how it will be utilized by the beneficiary.
• Explore adjustments to the current policy: Discuss with the current insurer or agent to see if the existing policy can be modified to meet new needs.
• Apply for a new policy: If adjustments are not feasible, apply for a new policy through an insurance agent or online.
• Ensure the new policy is active before cancelling the old one: Avoid gaps in coverage by confirming the activation of the new policy.
• Understand the waiting period and other clauses: Be aware of the contestability period, suicide clause, and other exclusions that may reset when changing policies.
• Weigh the potential costs: Consider surrender charges, tax implications, increased premiums, and other financial ramifications of switching policies.
• Compare benefits and alternatives: Evaluate the benefits offered by new policies and explore alternatives, such as adjusting the current policy or purchasing additional coverage.
• Engage with the current provider: Discuss options with the current insurance agent, as they may be able to draft a policy that aligns with the individual's evolving needs.
• Consider bundling discounts: Evaluate the impact on other insurance policies and explore opportunities for bundling discounts with the new provider.

Cancelling your permanent life insurance policy

Understanding the Process

Cancelling a permanent life insurance policy, such as whole life or universal life, is more complex than terminating a term policy due to the additional elements involved. Permanent life insurance policies are designed to provide lifelong coverage, with maximum coverage ages ranging from 95 to 121, and typically include a cash value component.

Surrender Charges and Fees

When you surrender a permanent life insurance policy, you may receive a payout from the accumulated cash value. However, this amount is often reduced by surrender charges, especially if you haven't held the policy for many years. Surrender fees can significantly reduce or even eliminate the cash value you receive, so it's important to review your policy's guidelines regarding surrender periods and fees.

Impact on Cash Value

In the early years of the policy, surrender fees can be substantial. Over time, these fees decrease, but it's crucial to understand that the cash value might not be as high as expected if you surrender the policy prematurely. Any outstanding policy loans or withdrawals will also reduce the cash value you receive.

Alternatives to Cancellation

Before cancelling your permanent life insurance policy, consider the alternatives. Permanent policies often offer options that might make it unnecessary to fully surrender the policy.

Using Cash Value to Pay Premiums

One option is to use the accumulated cash value to cover your premium payments or mortality costs, depending on the policy type. You can withdraw or borrow against the cash value to help keep your policy active, especially if you're facing financial challenges. However, this approach can reduce the death benefit your beneficiaries will receive, and if the loan isn't repaid, it will be deducted from the policy's death benefit.

Tax-Free Exchange (1035 Exchange)

You can surrender your life insurance policy and roll over the money into a new policy without paying taxes. This allows you to get rid of your current policy and replace it with a new one without tax consequences. Be sure to follow the insurance company's instructions to avoid any errors that could make the cash value subject to income tax.

Selling Your Policy

If you're considering cancelling your permanent life insurance policy, you may have the option to sell it to a third party. This could be in the form of a viatical settlement or a life settlement, depending on your health and financial needs. A viatical settlement is often chosen by those with a terminal illness and a life expectancy of less than two years, while a life settlement is typically for older individuals in good health who no longer need or can't afford the policy. Working with a reputable broker or settlement company is essential for this process.

Timing and Financial Implications

Cancelling a permanent life insurance policy has potential financial implications, so it's crucial to understand the consequences before proceeding. Cancelling during the "free look" period, which typically lasts 10 to 30 days, allows you to receive a full refund of any premiums paid. However, cancelling after this period, especially in the first 10 years, may result in surrender fees.

In summary, cancelling your permanent life insurance policy requires careful consideration of the financial implications, alternatives, and timing. Review your policy, understand the surrender charges, and explore options like using the cash value or selling the policy before making a final decision.

Getting a second opinion

• Review your current policy: Before making any changes, it's essential to review your current policy to understand its terms and conditions. Check if there are any fees or penalties for making changes to your policy and if there are any benefits you might lose by switching.
• Consult a trusted source: Consider seeking advice from a financial planner, accountant, or insurance expert. They can provide valuable insights and help you explore all your options.
• Compare alternatives: Research and compare different types of life insurance policies, such as term, whole life, or universal life insurance. Evaluate the benefits, costs, and coverage of each option to find the one that best suits your needs.
• Consider your life changes: Think about any significant life changes that have occurred or are expected, such as marriage, having children, divorce, or retirement. These milestones can help guide your decision on whether to switch policies and what type of coverage you need.
• Shop around for quotes: Don't settle for the first alternative you find. Take the time to shop around and compare quotes from multiple insurance providers. This will help you find the best coverage at the most competitive price.
• Understand the risks: Changing your life insurance policy may come with certain risks, such as undergoing a new medical exam, which could result in higher premiums or even denial of coverage. Be aware of these risks and weigh them against the potential benefits of switching.
• Read reviews and ratings: When considering a new insurance provider, look for reviews and ratings from reputable sources. This can give you valuable insights into the company's financial strength, stability, and customer satisfaction.
• Consider policy conversion: Instead of switching to a new provider, explore the possibility of converting, replacing, or supplementing your existing policy. Discuss your options with your current agent to see if they can offer a solution that meets your changing needs.

Changing your financial strategy

Firstly, review your current policy and determine if it can be adjusted to meet your new financial goals. Contact your insurance provider and ask them about your options. They may be able to convert your policy, replace it, or add a supplement to achieve the desired coverage. This approach could save you time and money, as well as help you avoid a new medical exam and a contestability period.

If changing your current policy is not feasible, you may need to purchase a new one. In this case, it is important to compare life insurance policies and providers to find the best coverage for your needs. Consider the type of policy, the amount of coverage, and the associated costs, including premiums, taxes, and upfront fees. Additionally, be aware that a new policy may require a medical exam, which could result in a higher premium or even make you uninsurable.

When switching policies, ensure that there is no gap in coverage by activating the new policy before cancelling the old one. Also, be mindful of any fees or financial consequences associated with ending your current policy, such as surrender charges and the loss of any money already paid into the policy.

Finally, consult a trusted source, such as an accountant or a certified financial planner, to get a second opinion and ensure you are making the right decision for your financial strategy.

Frequently asked questions