25 June 2012 0 Comments

To Replace Or Not To Replace, That Is The Question!

My first 36 Blogs gave you information needed to be an astute buyer of life insurance.  But once you have purchased a policy, can you just sit back and pay no attention to it?  Are there times when replacing a policy you own with a new one makes sense?  Are there times when replacement is only advantageous to the agent who makes a new commission?  The answer to all of these questions is “Yes.”  During the next several blogs I’ll discuss how to tell the difference.

The rules will differ based upon what type of policy is being replaced and what type is the being purchased, but regardless of policy types there are some rules that apply to all situations.  Here they are:

  • An existing policy pays a death benefit in case of suicide once it has been in force for two years.*  A new policy will only refund the premium in the event of suicide during this same timeframe.
  • A death benefit cannot be contested after a policy has been in force for two years* even if there were misrepresentations on the application.  A new policy need only refund the premium paid if the policy is successfully contested during this same timeframe.
  • If a policy is replaced there could be income tax due if the surrender value (including any outstanding loans) exceeds the cumulative premium paid unless IRC Section 1035 guidelines are followed (more on that later)..
  • Potential future dividends on participating whole life must be taken into account in determining whether replacement is in your best interest.
  • NEVER, NEVER discontinue your current life insurance until the new policy has been issued and in your possession,  it is exactly what was represented to you by the agent,  you have paid the premium and have signed all required delivery forms.

*Two years is the norm for most states.

Coming up I’ll cover the nuances of Term Insurance, Universal Life, Whole Life and Annuities—whether they are being replaced or purchased. 

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