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

When to Expect Modified Whole Life

Any reputable agent selling whole life insurance will avoid modified plans unless there is no other option. Every client dreads the bad news that only modified whole life can be offered (agents don’t enjoy giving the bad news either). To soften the blow, I’ve constructed a list of medical conditions that typically trigger an offer for modified whole life. I want to caution that every insurance company is slightly different in the medical conditions they accept, so don’t think of this list as exhaustive. Also, as a general rule, the companies with the best pricing tend to have more restrictive underwriting.

  • organ transplant
  • terminal illness
  • congestive heart failure
  • cognitive impairments such as dementia
  • heart problems within the last year
  • supplemental oxygen (some companies will accept this for sleep apnea)
  • recent drug or alcohol abuse
  • recent cancer
  • assistance with daily living activities (eating, bathing, etc.)
  • current dialysis

If you do get an offer for modified whole life, it isn’t totally bad. You will have full coverage after a two or three year waiting period. In the unfortunate event you pass away during the waiting period, the premiums you paid weren’t wasted because all of that money comes back to your beneficiary plus interest, and the interest is better than anything you would get at a bank. Be sure to contact us with any questions.

Graded Whole Life Versus Modified Whole Life

For all of you insurance nerds out there, there is a difference between graded whole life and modified whole life. Modified whole life is the more general term – it is any whole life plan where the benefits change over time. Ordinary whole life never has a change in benefits. Graded whole life is a subset of modified plans. Graded plans have a percentage of the death benefit that will only pay for accidental death during the first two or three years. There are two types of graded policies.

One type is often found on TV commercials and junk mail, talking about guaranteed acceptance and no medical questions. In exchange for no medical questions, the policy doesn’t pay any death benefit for the first two years unless its an accidental death (accidental death triggers all of the death benefit to be paid). In the case where its not accidental, all premiums are refunded along with interest. I’ll have a future blog post that discusses why people shouldn’t automatically jump to these plans without talking to an agent about qualifying for something better. Long story short, you should aim to get a simplified issue whole life policy to cover your burial or cremation needs.

Another type of graded whole life is less extreme and offers a gradual increase in the percentage of death benefit paid for non accidents. This type has a very small amount of underwriting. All graded plans behave the same as an ordinary whole life policy once the limited coverage period ends.

Navigating Life Insurance Terminology

Navigating life insurance terminology can be a daunting task because there are so many product names. To make matters worse, some product names are not official names of a product. For instance, burial insurance and final expense insurance are merely marketing buzz words used instead of the actual product name: simplified issue whole life. Another example is guaranteed acceptance life insurance, which is known by it’s real name as modified whole life. I can understand why these marketing terms are used. In the case of burial insurance or final expense insurance, the marketing terms help clarify the purpose of the insurance. Using the marketing term “guaranteed acceptance life insurance” is devious, however, because it draws attention away from the product’s negative aspects. If you have any questions, you are always welcome to contact us.

Accelerated death benefit riders allow a policyowner to receive all or a portion of the death benefit early if certain conditions are met. A recent article said accelerated death benefit riders are synonymous with critical illness riders and terminal illness riders. This is incorrect. Accelerated death benefit riders will pay out for a terminal illness, but not a critical illness. Terminal illness is defined as a non-curable medical condition that, within reasonable medical certainty, will result in death in 12 months or less. Critical illness is defined as a heart attack, stroke, or cancer. Notice there is no prediction of life expectancy with critical illness. Critical illness riders only pay out for a critical illness.

Some accelerated death benefit riders pay out if there is permanent confinement to a nursing home. Critical illness might indirectly lead to a pay out if someone had a bad stroke that led to permanent confinement. In every policy I’ve seen, this rider is automatic and free of charge. If fact, if you don’t want the rider, your only option is to make a written request to the insurance company. I don’t see the point in refusing the rider because the benefit payments are not automatic (you have to make a written request to receive payments).