Life insurance helps protect your family’s future. If you pass away suddenly, the proceeds from your life insurance policy can provide a financial lifeline to your loved ones. However, insurance needs are not set in stone.
If you are thinking about switching your existing life insurance policy, for a different kind of policy or death benefit amount, this post is just for you. It covers everything you need to know about changing life insurance policies.
When is the right time to change my policy?
Insurance needs can (and often do) change with time. For example, the small term life insurance policy that you bought in your early 20s to cover your student loan is not likely to be enough when you are married and have a mortgage. Coverage needs are also likely to reduce over time. If you are approaching retirement, have paid off your home loan, and have financially-independent children, you are not likely to need as much protection as you did in your 40s.
There can be any number of reasons for changing your life insurance policy, such as:
- Your insurance needs have changed. Maybe you have started a family and now need more protection than your current policy offers. Or perhaps you are newly single and do not require the level of protection that your current plan offers.
- You want to switch from a term life insurance to a permanent life insurance policy. Perhaps now you have a lifelong dependent and need a policy that pays out regardless of when you die.
- You want to switch from a whole life insurance policy to a term life one because it is cheaper or your current policy’s cash value is growing too slowly for your liking.
- Your term policy is approaching its term and the existing plan no longer meets your current financial needs.
- You are no longer able to pay your life insurance premiums
What to consider when changing policies
Before you drop your current policy in favour of a new life insurance policy, there are several things to consider, including the following:
The medical exam
Traditional life insurance policies require you to take a medical exam. It helps insurance carriers to thoroughly assess your insurability and accurately set your premium rate. While life insurance rates go up as you age, the increase can be quite steep if your health has changed considerably since you last bought a policy. And if you have developed a serious medical condition, insurance companies may refuse to extend you a standard life insurance policy altogether. Keep this in mind before you terminate your existing coverage.
Review different options
Before changing life insurance policies, compare the different types of insurance options available to you. While term life is appropriate for most people, in certain situations a whole life or universal life plan may make better sense. For example, let’s say you previously had a term life insurance policy, but now that you are earning in a high-income bracket, you want to take advantage of the investment component built into whole life and universal life insurance.
If you are planning to switch from term life to permanent life insurance, consider speaking to an insurance broker. While both whole life and universal life insurance accumulate cash value, there are significant differences between the two. An expert can thoroughly assess your financial needs, explain these products, and help you pick one that perfectly matches your current situation.
Switching Life Insurance Companies
Sometimes you have the type of life insurance policy you want but, the insurance company you are with just isn't the right fit. Often changing your policy makes sense if you are looking to switch life insurance companies.
Keep the contest ability and suicide clauses in mind
Life insurance policies generally include a contest ability and suicide clause. If you die within the first two policy years, the contest ability clause allows your insurance company to reject the death benefit claim if they find you willfully omitted, lied, or misrepresented on your application.
The suicide clause is a standard provision that allows the insurance company to deny the claim if the policyholder commits suicide within two years of purchasing the policy. Generally, the insurer refunds the premiums dollars into the policy to the beneficiary in this case.
If your existing policy is more than two years old, these clauses no longer apply. So, when you take out a new life insurance policy, you will lose this advantage.
Consider converting your current plan
Generally, life insurance providers allow policyholders to convert their term plans into permanent life insurance without a medical exam before a certain age. If you currently have a term policy and want to switch to a permanent plan, check if the conversion option is available. If so, converting your existing plan into a permanent one may prove a better choice than buying a new life insurance policy. You will be able to avoid the medical exam, contest ability period, and the suicide clause.
Look at the overall cost of switching to a new life insurance policy
When changing life insurance policies, consider the overall cost of replacing your existing coverage.
Apart from new premium rate, there are several things that you consider, including the following:
- Insurance becomes costlier with age
- Take into account the tax consequences of terminating your existing policy before buying a new plan
- Compare the benefits offered by the new policy against the current policy
- If you are using your current policy’s cash value to fund a new policy, make sure you have sufficient funds. Otherwise, you will have to make additional payments\
- If you are terminating a whole life policy, you may have to pay a surrender fee
How to change your life insurance?
Before you start looking for a new insurance provider, decide on the type of life insurance you want and determine how much coverage you need.
Picking the right type of life insurance policy
Life insurance policies are either term or permanent. Term plans last for a specific period, like 10, 20, or 30 years. Your beneficiary receives the death benefit only if you pass on during the policy’s term, though you can renew your coverage without taking a medical exam up to a certain age. Term life policies do not build cash value and as such are the purest form of life insurance. They are also more affordable than permanent life policies.
True to its name, permanent life insurance is lifelong coverage, provided you pay the premiums. Many of these policies also accumulate value, which the policyholder can access during their lifetime. When the insured passes away, the beneficiary gets the death benefit amount. Any cash value remaining in the policy generally reverts to the insurer.
So, which one is right for you — term life or permanent life? That depends on your personal and financial situation.
You should consider term life if any of the statements describe you.
- You want to buy a life policy primarily to cover your debts. Many debts do not simply disappear after your death. For example, if your parents have cosigned your student loan, they will be on the hook for payments if you pass away unexpectedly. Likewise, if you die with a mortgage balance, your family may be forced to dip into their savings to clear the loan or risk foreclosure. If you have a debt that may be passed on to others, think about buying a term policy that lasts as long as your loan.
- You want life insurance for income replacement. Perhaps you are the primary earner of your young family and want a policy to secure their financial future or until your children start earning. A 20- or 25-year term policy may be perfect for you, ensuring your loved ones will be able to live comfortably if worst comes to worst.
- You need life insurance until you are financially independent. If so, purchase a term life plan that provides coverage until your retirement.
Think about setting up a permanent life plan if any of these statements describe you:
- You have a lifelong dependent. If you are a parent of a child with special needs or someone who takes care of a relative with a disability, a permanent policy will suit you better. That is because it pays out regardless of when you pass away.
- You are a high-net-worth individual and want a life insurance policy that can also act as an investment tool. Many permanent policies build cash value, which grows tax-deferred. Consider taking out such a policy.
- You want a life insurance policy to cover your funeral costs. If you do not want to burden your loved ones with your end-of-life expenses, a small permanent policy is ideal for you.
Determining how much protection you need
Now that you know which type of life insurance fits your needs, it is time you figured out how much coverage you need. While it is nearly impossible to determine coverage needs down to the penny, you can come up with a fairly accurate figure by considering your reasons for buying life insurance. Are you buying a policy to cover your mortgage? Do you want life insurance to replace part of your income if you were to die within next 20 years? Are you looking to leave an inheritance for your children or just cover your funeral costs?
The amount of coverage you need will depend on how you want the death benefit to be used.
Things to keep in mind
- Shop around for a new policy as much as possible. Life insurance rates vary considerably by insurer, and no single provider is the cheapest option for every type of buyer.For example, the life insurance compact that has the best rates for 20- or 30-year-old applicants may not be the most affordable option for older people looking for a final expense policy.
- Some life insurance products can be quite complex. Take, variable universal life insurance, for example. For the right person, it can be a smart option, providing lifelong coverage, potential to generate handsome returns, and a lot of control over the built-in investment account and premium payments. But if you do not know how it works, you may have a tough time managing it. Speak to a life insurance broker if you are interested in setting up a whole life or universal life insurance policy to ensure you know exactly what you are getting into.
- A whole life policy comes with a substantial surrender fee during the first several years. If you are taking out a new whole life plan, keep in mind you will not be able to cancel it for its cash value within the first 10 years or so.
Changing life insurance policies is not as complicated as you may think. However, there are things you should consider first. These include the cost of buying anew policy, the contest ability clause, and the tax implications of dropping your existing policy.
If your current plan no longer fully meets your needs, Dundas Life can help you understand all the available options. If a new policy is required, we will help you find the right coverage at the most affordable price.
Frequently Asked Questions
1. What is the difference between term life insurance and whole life insurance?
With term life, you receive life insurance protection for a specific period, which can be as short as one year or as long as 35 years. Depending on your policy, you can renew coverage at the end of the policy term without submitting proof of good health. The policy does not build cash value and pays out only if you pass on during the policy term. Whole life insurance, in contrast, covers you for your entire life and accumulates value. Generally, your beneficiary will receive only the death benefit upon your death. Any remaining cash value will revert to your insurance company.
2. Is it possible to convert a term life policy into a permanent one at any time?
Most term life plans allow policyholders to switch to a permanent life insurance policy without taking a medical exam, but this option is usually only available for a specific period.For example, the conversion option may be available only during the first few policy years or until a certain age. Depending on your life insurance company, you may be able to switch to permanent insurance without cash value or whole life or both. A few providers also offer the option of converting to a universal life policy.
3. Is it possible to switch your life insurance at any time?
Yes, you can drop your current policy at any time and buy a new one, assuming an insurance company is willing to extend you coverage. However, since life insurance premiums increase with age, you are likely to pay a higher premium. And if your health has recently taken a turn for the worse, your monthly insurance bill could be several times more than what you are currently paying. Speak to an insurance broker to discuss your options. In many cases, converting the existing plan, reducing the coverage amount, or buying a small supplemental policy might be a better solution.