When is the right time to replace my existing life insurance contract?

moneyAfter looking over the September Special Edition Fraternal Herald, wfla talked with several members who decided to give their certificates a second look. Our financial guru, Julie Cole, helps determine if you need to give your certificates a second look in the article below.

We’ve recently seen several situations where traditional Whole Life insurance contracts are being replaced with a “new” kind of life insurance contract. The new and “improved” life insurance contracts aren’t always the right fit for you.

There are a few good reasons for replacing some life insurance contracts, but generally it’s not a good idea. Here are several reasons why you should NOT replace an existing contract.

1. If you’ve had a whole life policy for more than three years, you’ve already gotten the up-front costs out-of-the-way, and your policy will start to accumulate value.

2. The cost of insurance is higher the older you get. Taking out a new policy usually means higher premium payments.

3. You are subject to new incontestability and suicide periods with your new coverage.

Here are some situations when it might be worthwhile to replace that old contract with a new contract:

1. Total cost. If the new policy will cost you considerably less than your existing policy(s), it may make sense to replace the existing policy. You may have several very small policies. The premium for the new coverage may also have greater cash value potential.

2. Flexibility. The new policy may be better suited to your cash flow. A Universal Life allows you the opportunity to skip premiums rather than borrowing from the policy, within certain guidelines.

3. Heavily borrowed. You have an old Whole Life policy that you’ve stripped bare. The interest and loan repayments and ongoing premiums make it too expensive to keep the remaining death benefit. (Warning – this can create a tax liability).

If you’re considering replacing your policy, make sure you do ALL of the following:

1. Be skeptical. Make sure you fully understand the advantages of replacing your existing policy. What will the new policy accomplish? Is it consistent with your current and future needs? Ask what is the downside to replacing an existing contract?

2. Understand the new contract. If you can adequately explain the benefits of the new contract versus the benefits of the old contract, then you likely have a complete understanding. If you can’t explain the new contract to a spouse or friend, then it is likely too complicated for you.

3. If a new agent has approached you about switching policies contact the company of the contract you are considering replacing. Ask if your existing contract can be modified to better meet your needs and/or ask if you should keep it as is.

4. Beware of illustrations. Illustrations can be misleading. Illustrations generally show a level interest rate for the life of the contract, but that just doesn’t happen. Just because the product is illustrated at 6.5% does not mean it will get 6.5% in any year. Be sure to ask when the contract will lapse based on the guaranteed minimum return.

Many of us remember the 1980’s when there was a shift from traditional Whole Life products to Universal Life products (UL). This was a result of very high short-term interest rates, and everyone wanted in on the high rates. However, when interest rates fell back to historical average rates, the UL contracts lapsed. The illustrations showed very high returns and very low premiums that did not support the contract for a lifetime.

5.NEVER CANCEL YOUR OLD POLICY UNTIL THE NEW POLICY IS IN FORCE.  A life insurance policy is in force once the policy is issued and the first premium is paid.

6. Ask your existing insurance carrier if surrendering the contract will create a tax liability. If there are no loans against the cash value, then you may want to do a 1035 exchange of the cash value.

Traditional Whole Life contracts transfer all risk from the insured to the insurance company. Most types of Universal Life insurance contracts shift some of the risk back to the insured and not to the insurance company.

(Except a guaranteed Universal Life contract that has a required minimum payment). Universal life contracts have the ability to change the cost structure (mortality costs and expenses) and interest crediting method at any time.

The bottom line. Any suggested replacement of a traditional Whole Life insurance contract should be met with skepticism. You will likely be giving up guarantees that the old contract has and will be assuming some of the risk that the new contract does not cover.

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