A life insurance policy is a financial asset, which needs to be reviewed on a regular basis to ensure you are getting the value you expect, in exchange for the premium dollars you pay to the life insurance company.
Things change in the real world, which could leave your policy vulnerable. Policies could be affected by a change in your personal preference, the issuing company’s financial condition and increased competition in the insurance industry.
Also, life insurance is a complex financial tool that provides you with financial leverage.
Meaning, there’s no substitute for life insurance; it is unique in its ability to provide a self-completing financial plan, should the insured person die unexpectedly. Life insurance can be used to replace lost income, pay the federal estate tax, and provide additional funds.
Depending on many factors, replacing an in-force life insurance policy can either be a very good or very bad decision.
Traditionally, the viewpoint within the life insurance industry is that replacing an existing life insurance policy with a new one is generally not in the policy owner’s best interest.
Information provided here is intended to aid you in the replacement decision-making process; but keep in mind, that your individual situation is unique and there is no one-size-fits-all solution.
In the simplest of terms, replacement means discontinuing one life insurance policy to purchase another one. This may be internal (i.e., replacing it with a new policy from the same company) or external (i.e., replacing it with a policy from a different company).
However, there’s a very fine line dividing replacement (which is permissible under state insurance law) from twisting (which is prohibited by state law).
Twisting involves replacing a life insurance policy primarily for the agent’s benefits, to earn a new agent commission.
By definition, twisting is the practice where an agent induces a policy owner through misrepresentation to discontinue an existing life insurance purchase and purchase a new one with the proceeds.
The legal meaning of the word “replacement” varies from state-to-state, which is why it is a good idea to become familiar with your own state’s definition before making a decision.
To locate your state’s insurance code and replacement regulations, visit the National Association of Insurance Commissioners website.
Some state insurance departments are well funded, which leads to better staff and ultimately more regulations. In general, the larger state insurance departments are better equipped to enforce the replacement regulations, but this is not always the case.
If are considering replacing your current policy with a new one, please seek out assistance from your life insurance adviser or email me at email@example.com.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.