Should I Replace My Life Insurance Policy If I Find A Better One?

This post discusses the good and bad reasons for replacing a life insurance policy.

I read life insurance articles all the time. One article that I read said replacements are typically a bad idea. As an agent, I know there are legitimate and illegitimate reasons for replacing a life insurance policy, but I would never make a blanket statement that replacements are generally good or bad. That would be irresponsible. Let’s start off discussing legitimate reasons for replacing a policy.

When it comes to simplified issue whole life, underwriters don’t care about certain medical events such as heart attacks if the event occurred long enough in the past. In fact, someone can have a dozen heart attacks and it wouldn’t matter as long as he or she passes the time threshold (agents call this the lookback period). I’ll explain why the lookback period matters when considering a replacement. Let’s assume someone was scared into buying a life insurance policy because he or she had a heart attack less than a year ago. That person would be limited to modified whole life. Modified whole life (sometimes referred to as graded whole life) has a two or three year waiting period for full coverage. During this waiting period, the full death benefit is only paid out for an accidental death. Let’s assume a year passes and the same person can now qualify for ordinary whole life (no waiting period). Replacing a modified whole life policy with ordinary whole life is appropriate in this situation.

That last example was an obvious one. A less obvious choice occurs when the same type of policy with the same amount of coverage is considered for replacement because of price. Many agents will point out that a replacement starts a new contestability period. A contestability period is a two year period from the start of a policy in which the insurance company can investigate a death claim. The consumer risk associated with a contestability period is sometimes overstated. As long as the insured was honest on the application, there is nothing to worry about except for a slight delay in benefit payments as the insurance company investigates the claim.

If there is only a slight price difference between the old policy and new policy, a replacement might not be worth it. The small price difference won’t justify losing the time spent satisfying the contestability period. Also, a replacement means you’ll be cancelling the old policy, and there is a time investment with that process (granted its not a huge investment of time). Be wary of agents pushing for a replacement when both policies are of the same type and similar price. Agents typically receive more commission by doing replacements instead of extra policies.

Are you protected from bad replacements? Yes, the insurance industry has put some safeguards in place. One safeguard is a free-look period in which a replacement can be rescinded and a full refund issued on the new policy that was purchased. The agent is also required to give you literature that helps you be more informed about replacements. Below is a sample replacement form that is used for all replacements in the state of Texas.

First page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 1
Second page of standardized replacement form used in Texas
standardized replacement form used in Texas – page 2

How To Cancel a Life Insurance Policy

Ideally you pick a life insurance policy that you keep forever. However, there are times when you need to cancel. There are a couple ways to cancel. The first way is over the phone. If you cancel over the phone, the customer service rep will stop automatic payments and mail you a cancellation form. Here is the problem: customer service reps are trained in retention. For instance, they might bring up the contestability period, which is a common scare tactic.

You can bypass the customer service rep by faxing a written cancellation request (don’t forget to sign your name). You might need to call the insurance company for the correct fax number, but they will freely give that information without pushback. In your written request, you should mention the effective date of cancellation and the policy number. You should also include a statement that says your decision is final and you don’t wish to discuss it with an agent. That last part is necessary because insurance companies will sometimes call your agent so he or she can talk you out of it. If you are cancelling a policy with cash value, make sure you read my article on nonforfeiture options before you cancel.

The Contestability Period

Learn about one of the most important parts of a life insurance contract affecting claims.

Every consumer I talk to doesn’t know what a contestability period is, which is understandable since people don’t ordinarily spend their time reading insurance contracts. The contestability period is arguably one of the most important clauses of a life insurance contract. It says that a death claim can be contested (investigated) for the first two years of a policy. Best case scenario: a death in the first two years of a policy will slow down a benefit payment for a few weeks as the claim is investigated. Worst case scenario: the claim is denied because the insured answered the underwriting questions incorrectly. If a claim is denied, all premium payments are refunded, along with a small percentage of interest, but no death benefit is paid.

If you ever decide to switch life insurance companies, the company being replaced will often bring up the contestability period as a scare tactic. While it is true that a new policy means a new contestability period, there is little to worry about if you are being honest on the application. You can contact us to learn more.