Before replacing or canceling a life insurance policy

Existing coverage has history that a new policy does not

An older policy may have a premium schedule, cash value, surrender-charge position, conversion right, loan balance, and contestability history that cannot be recreated. A proposed policy may offer different features, but those features need to be weighed against everything that would be lost.

The NAIC advises consumers not to cancel an existing policy until the new policy has been received. It also notes that changing the existing policy may sometimes address the current need without a full replacement.

Keep the existing policy in force while the proposed policy is underwritten, issued, delivered, reviewed, and accepted. Never rely on an application or preliminary quote as proof that new coverage exists.

What can change in a replacement

FINRA warns that a replacement can reduce accumulated value through first-year expenses, begin a new surrender-charge schedule, increase premiums after health changes, and usually start a new two-year contestability period. Surrendering a policy or moving values can also create tax consequences.

• New underwriting, premium class, policy exclusions, or coverage limits.
• A new contestability period for statements made in the application.
• A new surrender-charge schedule and different early cash values.
• Loss of existing guarantees, conversion rights, riders, or favorable contract terms.
• Tax exposure connected with surrender gains, policy loans, or an exchange that does not qualify under federal rules.

Ask for a side-by-side comparison

Request current in-force information for the existing policy and insurer-approved materials for the proposed policy. Compare guaranteed values separately from non-guaranteed values and ask the person recommending the change to explain compensation and every feature that will be lost or gained.

• What is the total cost of the replacement over time?
• Can the existing policy be changed or supplemented instead?
• Which current guarantees, riders, or rights would end?
• How do the guaranteed values compare at the same future years and ages?
• What commission or other compensation is connected to the replacement?
• What tax or legal questions require an accountant or attorney?

A 1035 exchange is not a blanket promise of no tax

Section 1035 of the Internal Revenue Code permits certain direct exchanges, but not every replacement qualifies. Receiving funds personally and then buying a new policy may be treated differently from a qualifying direct exchange. Outstanding loans can create additional complications.

Boyd Financial Group does not provide tax or legal advice. Before surrendering a policy, moving cash value, changing ownership, or completing an exchange, ask the insurer for the transaction details and consult a qualified tax or legal professional when appropriate.