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  • Why should I keep my current life insurance policy?
  • August 5, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Replacing an existing life insurance policy is a difficult decision to make, which may even require additional assistance from your life adviser or insurance company. Replacing your policy could either be a very good or very bad decision.

    While replacing your life insurance policy may work in some instance, most of the time this isn’t the case. There are many factors to take into consideration before replacing your policy.

    Consider the follow issues before making a decision. If you can associate yourself with any of these issues, replacement may not be in your favor.

    When replacing an existing policy, you will incur new first year expense charges for agent compensation, issue and underwriting. The first year of a policy is typically the most expensive year.

    The suicide clause and contestable period (i.e., where the company can challenge the policy) start anew, unless the replacing insurer is willing to waive them (be sure to ask).

    If your health deteriorates, replacing your life insurance policy is not in your favor.

    If your health has deteriorated since the issue of the original policy, or if the original policy was issued with no premium difference between smokers and nonsmokers, and you’re a smoker.

    Existence of the new suicide clause and contestable period, advancing age or health concerns, and the loss of important grandfathered rights are some of the more obvious reasons why replacement cannot be justified.

    If the existing policy does not qualify for an Internal Revenue Code Section 1035 tax-free exchange, which allows certain exchanges of life insurance to be made without the immediate recognition of gain.

    For example, if there is an outstanding policy loan, it may be difficult to affect a tax-free exchange. The taxable income generated by an exchange that does not qualify for tax-free treatment could be significant.

    Before policy replacement, discuss it with your life adviser and insurance company. As insurance companies grow, their policies tend to chance and may even become obsolete. When this happens, they will recommend upgrading your policy or policy exchange programs.

    On the other hand, there may be circumstances where replacement is indicated by the facts and circumstances. An ethical agent should provide their client with the facts and objective information needed to make an informed decision.

    This information should include the reason why the current policy should not be replaced and – when appropriate – how the existing policy might be modified to accomplish the goals.

    The need for additional coverage is not, by itself, a justification for replacement. A better approach is purchasing a new policy to cover the additional amount needed.

    If you seek further assistance or additional information, please feel free to email me at

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

Creative Commons License
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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