12 July 2012 0 Comments

The Permanent-To-Permanent Replacement (Part 1)

Is this the epitome of an oxymoron?  If something is permanent why should it be replaced?  And is the policy with which it is being replaced really permanent, or will it also need to be replaced at some time in the future?  Read on and I’ll tackle this conundrum.  I’ll break this into two categories of permanent policies that might be replaced:  Whole Life and Universal Life.

Whole Life

Here are three satiations that might call for the replacement of an existing Whole Life policy:

  • When actual dividends are substantially lower than had been anticipated, or are non-existent due to a financial reorganization.

Owners of Participating Whole Life policies should check periodically to see how actual dividends stack up with projections.  The worst case scenario is when the insurance company runs into financial troubles and is forced into reorganization or sells its policies to another company.  In this instance it is possible that dividends will completely dry up.

  • When a policy loan creates substantial interest charges.

If you are paying interest on a policy loan –in addition to the premium—costs   can get out of hand.  I’ve witnessed several times when instead of paying interest in cash policy owners  keep adding interest to the loan, compounding the problem until the policy ultimately cannibalizes itself.  You could repay the loan, but before that, see whether depositing that same amount into a new policy might produce better results.

  • When your goal is  to obtain the highest guaranteed death benefit for the lowest premium and you find another policy that does this better.

There are times when people just buy the wrong policy to meet their needs, or their needs have changed since the policy was purchased.  When this happens, you aren’t committed to staying with a mistake.

CAUTION:  If you own a Participating Whole Life Policy that was issued more than 10 years ago, dividends are being paid as anticipated, the insurance company is financially stable and you have a need for permanent insurance, then it is unlikely that replacing that policy with another Permanent Policy is in your best interest.

Next I’ll be discussing replacement of Universal Life Policies and what type of policy to consider for the replacement. 

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