Life insurance replacement simply means discontinuing one life insurance policy to purchase another one. And, since life insurance is a complex financial tool, policy replacement is a very involved decision-making process. People in the life insurance industry are typically against policy replacement because they believe it does more harm than good. However, there are circumstances where replacement has benefited the policy owner.
However, there are circumstances where replacement has benefited the policy owner.
Since this is such a controversial concept, some of the information has been tainted by myths. Here’s a list of some of the common myths:
Your policy is on the old mortality table and therefore your current insurance company is taking advantage of you by failing to recognize that people are living longer than when the older mortality table was developed.
The nonforfeiture values and reserves are based on the older table, but that alone is not a problem. The real issue is whether current mortality experience is being reflected in the dividends – if the policy is participating – or in the mortality charge – if the policy is interest sensitive.
Your policy is out of date, which implies that periodic policy recycling is “normal” and an accepted, desirable business practice.
If current mortality and interest experience is being credited, the age of the policy should not be of concern. If not, you may have a valid case for replacement.
Another valid replacement indicator: the policy owner has an old policy in which the company makes no distinction between smokers and nonsmokers (some companies refer to this as a unismoker policy). If this is the case and the client is a non-smoker, replacement should be considered.
The company that wrote your policy is out of business or has been taken over. The real myth is that such as situation always have negative implications for the policy owners. It may be that the company has simply changed their name, which happens quite often.
You need more information before reaching a conclusion on this issue.
The company may have changed their name, been merged into another company, or been purchased by a stronger company – which could make retention of the existing policy much more desirable.
You should buy cheap term life insurance and invest the difference in premiums between term and permanent life insurance. The myth here is that there is never a need for permanent life insurance.
Sometimes there are permanent needs, which require permanent life insurance. Although in the majority of cases, term life insurance will meet the need at a much more attractive cost but this depends on your personal situation.
When it comes to life insurance, there is no one-size-fits-all definition.
The agent portrays state insurance department mandated replacement forms and procedures in a way that implies that the state endorses the replacement.
For example, the agent might say that this is the state approved procedure for helping people in your situation.
The real intent of insurance-department replacement forms and procedures is to assist the consumer in making an intelligent decision about whether or not a replacement is desirable under the particular circumstances.
Steuer, author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, has more than 25 years of experience and holds the Department of Insurance Analyst License (LA) as well as the Charted Life Underwriter (CLU) designation. Tony holds various leadership positions and has authored three books on the topic of life insurance.
Steuer’s work has been awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy for his The Questions and Answers on Disability Insurance Workbook and The Questions and Answers on Insurance Planner. Forbes named Questions and Answers on Life Insurance: The Life Insurance Toolbook as one of their top nine great investment books.
He’s also the founder of the Insurance Literacy Institute and creator of The Insurance Bill of Rights designed to empower consumers and to identify members of the Insurance Industry dedicated to strong professional standards.