4 February 2014 0 Comments

Want More Life Insurance? Should You Replace Your Policy?

Blog Photo 202 Two years ago you bought a $200,000 ten year term policy.  Now, there is another child on the way so you want to increase your coverage by $150,000 to a total of $350,000.  Your agent tells you you’ll have to apply for a new policy rather than just increasing your current policy.  Why is that, you ask?

The main reason you can’t just add another $150,000 of coverage to your existing policy is because this new coverage will have a new contestable and suicide exclusion clause that won’t apply to the original $200,000. Additionally, your agent tells you to drop the current $200,000 policy and take out a single policy for $350,000.  Does that make sense?  Yes, it does.

You were age 33 when you bought the $200,000 policy for which you are paying an annual premium of $112.  Now, at age 35, assuming you qualify for the same premium class (only at increased age rates), a $150,000 ten year term policy will cost $104 per year.  Add that to the $112 and your total annual premium for the $350,000 will be $216.  However, if you instead apply for a new $350,000 policy and drop the original $200,000 policy, your annual premium at age 35 will be only $144.  That’s a savings of $72 per year, or 33.33%.

You don’t need to be a rocket scientist to realize that it makes sense to replace the current policy instead of keeping it and purchasing a new policy only for the increased amount.  The only disadvantage is that the two year contestable and suicide exclusion period that the original $200,000 policy had already outlived will be newly established.  If the savings were only minuscule this might be a consideration, but a 33.33% savings is substantial.  There is an additional advantage to replacing the old policy:  the entire $350,000 will have 10 years before there is a premium increase, instead of the guarantee for the original $200,000 dropping off after only 8 more years.

Another lesson to learn from this example is to always consider more coverage when applying for life insurance.  If you need more, an additional amount will not create a pro-rata increase in premium.  Take advantage of quantity discounts.

Next, I’ll look at how to most effectively increase the duration of your term coverage.

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