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How do I decide if I should replace my existing life insurance policy with a new one?

There are several reasons why you may want to replace your current life insurance policy with a new one.

If you have term insurance, you may want to replace your policy to reduce the price, extend the coverage period, or increase the amount of insurance. Keep in mind, though, that you likely will be required to pass a medical exam.

Replacing your permanent life insurance gets more complicated. You may be tempted to replace a policy because a new policy has a more attractive interest rate. This may be misleading, though. You need to be aware of the following:

  • Unless you're considering whole life insurance, the current interest rate that your cash value earns is not guaranteed. There is a guaranteed minimum interest rate that is usually considerably lower than the current rate. An agent may show you projections of what your cash value will earn over the next 15 or 20 years. In the projections, the insurance company uses its current interest rate, but there is no guarantee that same interest rate will be in place for as long as the projections indicate.
  • The initial costs of a life insurance policy are high. As a result, your cash value could be reduced.
  • If you cancel a life insurance policy early, you'll have to pay a surrender charge, a fee that can be expensive.
  • Your annual premiums may go up. The insurance company takes premiums out of your cash value account, which could deplete your cash value.
  • Your agent should have you sign a form indicating that you understand all consequences of the exchange. Watch for this form.
  • Make sure you have the new policy in hand before you cancel the old one.

Remember that incontestability and suicide clauses will be in effect for the first two years of your new policy. An incontestability clause states that the insurance company may not contest the policy after it has been in force for two years. The only exception is for nonpayment of the premium. A suicide clause states that the insurance company will not pay the death benefit if the insured dies by suicide within the first two years of the issue date.

Talk with a trusted financial advisor before exchanging your policy. You may be able to accomplish your goals with your current policy.