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Someone is telling me I should replace my existing
policy with a new one. What should I do? |
Think
twice before discontinuing or changing your current life
insurance policy in order to buy a new one. It is rarely
in your best interest; following are a few reasons why...
- It Could
Cost You. During the early
years of policy ownership, much of what you paid
covered the insurance company's expense of selling
and issuing the policy. This expense will be
incurred all over again when you buy a new policy.
If a cash value policy is surrendered
and the proceeds placed into a new policy,
the cash value may be relatively small for
several years due to the imposition of surrender
charges. In fact, the new policy's cash value
may never be as large as that of the existing
policy.
If you are older and your health has changed, premiums and/or insurance
charges for the new policy will often be higher. Beware of anyone
offering free insurance or more insurance at a lower cost. It is likely
the premium due on the new policy is being paid by drawing cash from
an existing policy.
- You Could
Lose Guarantees. Life insurance is
purchased to assure the accumulation of a desired
amount of liquid capital at death. If you are considering
the purchase of a variable life (VL) or variable
universal life (VUL) policy, be aware that you bear
all of the investment risk and more of the risk of
adverse trends in mortality and expenses than with
a traditional whole life policy. The cash value,
and perhaps the death benefit, under VL and VUL policies would
not be guaranteed.
- You Could
Lose Benefits. Certain provisions
such as the suicide and contestable clauses are required
by state law to safeguard the policy owner and beneficiary.
Usually after one or two years from the date of the
policy, the insurance company cannot challenge the
validity of the policy or deny benefits if death
is a result of suicide. These clauses, which may
have already been satisfied in your existing policy,
will often start over on a new policy. The result
— the insurance company may have the right to cancel
the contract or refuse to pay a claim for certain
events during the initial period of the policy.
- You Could
Owe Income Taxes. According
to Section 72(e) of the Internal Revenue Code, upon
the complete surrender of a policy, if the gross
cash value of the present policy exceeds the new
premiums paid, the difference is taxable to the policyowner.
You should understand that a 1035 exchange does not
eliminate taxable income if there is a taxable gain
and there is an outstanding policy loan at the time
of surrender.
- Get
All The Facts. Before making
the decision to replace or exchange an existing
policy, make sure you get all the facts. Read over
your existing policy, and ask your representative
or a member of your insurer's policyowner service
department for a detailed cost breakdown of premiums,
cash surrender values and death benefits. Request
the same information for the new policy you are
considering. Then, compare the two thoroughly.
Make sure you hear from both your existing company and your proposed
company before you make your decision.
If your requirements have changed since you bought your policy, you
may be able to change your present policy, or even add to it, to get
the coverage and benefits you now need.
If you decide to replace the policy you now own with other insurance,
be sure:
- To insist that the agent making
the proposal put it in writing.
- That you qualify for the insurance
applied for.
- That you do not take action
to terminate your existing policy until your
new policy has been issued and you have examined
it and found it acceptable.
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