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How To Cancel Or Change A Life Insurance Policy
Article 4 of 5 in Understanding Your Life Insurance Policy
Replacing or changing life insurance policies can be tricky and the process varies depending on whether or not you have a term life policy or a permanent policy with accumulated cash value. When you make a decision to change policies or cancel your life insurance, then you need to take the time to evaluate the reason behind the change and make sure you are making the right decision.
TIP: An experienced life insurance agent can help you make the decision to change or cancel a policy. If you are confused, don't hesitate to contact an agent before you take action.
Changing a Term Life Policy
If you want to cancel a term life insurance policy because you no longer feel like you need life insurance or you have found one at a lower price, then there are some things that you need to consider before taking this step:
- Be Sure: If you are cancelling coverage all together, then make sure you no longer have any reason to carry life insurance. This means you do not have a mortgage, your children or spouse can be self sufficient, and there is not anyone otherwise depending on you for financial support. Do not lightly cancel a policy. Make sure others do not need you to carry life insurance.
- What is the Cost: There may be a surrender fee for canceling your term life insurance policy. You need to ask your life insurance company about that before you make the decision to cancel. Also, if you have a return on premium rider in your policy, find out how much of the premium will be returned to you if you cancel the policy early, and when you can expect to receive your check.
- Coverage Level: If you are considering dropping your existing coverage for a new policy at a lower cost you should make sure that the newer policy has the appropriate coverage. Make sure that when you get a life insurance rate quote, you tell the insurance agent that the new policy will be replacing an old policy to ensure the same level of coverage. Doing so lets the agent know that their needs to be an analysis of the existing policy to make sure that you are just not getting a lower rate but the same coverage.
- Changes in Health: You have aged since the first policy and your health status may have changed as well. If your health or weight have changed, you could fall into a different rating category (preferred, standard or sub standard), and end up paying more in the long run.
- New Contestable Period: The contestable period is the time period in the policy when something in your application, such as the state of your health or not being truthful on an application can result in the denial of a claim. It is typically in effect for a year or two after the time a policy is issued. If you change policies, the clock will reset on your contestability period and you can risk losing coverage for those two years.
These concerns need to be addressed before you make your final decision on whether or not to cancel your term life insurance policy. If you have any questions about whether or not it is wise to cancel or change your term life insurance, consult an experienced life insurance agent.
Canceling or Changing Permanent Life Insurance Policies with Cash Value
Changing or replacing a life insurance policy with accumulated cash value is more difficult as you need to do more analysis to make sure you are not losing value by changing policies. Simply comparing the premiums of cash value life insurance is not enough. The policies may be very different in their features. To determine the true cost of a policy, there must be an adjustment for the time value of money. In other words, if you pay (or receive) money some time in the future, it is not worth the same amount as money paid (or received) today. This analysis is known as cost disclosure, and requires you to examine the cost index of your policy and the other policy you are considering.
Most states have now adopted the interest adjusted index method of cost disclosure as recommended by the National Association of Insurance Commissioners (NAIC) for comparing the cost of life insurance policies. This method adjusts the life insurance payments based on when they are received and is done using two parts of the cost index:
- Net Payments: This index compares the cost at some future point (say 20 years from now) if you continue paying your premiums on your policy and do not take its cash value. This index is useful if your main concern is the death benefits and don't plan to cash in your policy for its cash value.
- Net Surrender: This index uses a calculation that takes into account the cost of maintaining the policy over time showing you the cheapest policy. This is important if you feel you will cash the policy in at some point.
If you want a life insurance quote comparison on similar policies (for example, a whole life from one company against a whole life from a competitor) look at the index that reflects what you intend to do with the policy. If you think you would cash your policy in at some point, then focus on the net surrender index, and if you think the policy will be around until your death then look at the net payment index. In either case, the lower number reflects the cheaper policy.
Cost disclosure forms give you a standardized measure of the cost of the insurance coverage. It takes into consideration the time value of money and allows you to compare the cost of this insurance against other plans.
TIP: Insurance agents are required, by insurance regulators, to provide you with the cost disclosure form and cost indexes. Make sure that your insurance agent reviews your decision with you before proceeding. It is often not to your advantage to replace a cash value policy because cash values tend to build up slowly and you would be starting that buildup again with a new policy.
Changing or replacing a cash value life insurance is more difficult as these policies require more analysis to make comparisons due to the build-up of cash value. Make sure you talk to a professional before replacing these policies. You don't want to loose your cash value or coverage.
Review Annually with Your Agent
An annually needs analysis review with your agent is a good idea. Insurance representatives do such reviews as a service for the policyholders in order to verify and update beneficiary designations and to identify other changes that might be needed. These reviews may reveal that you have gaps in your insurance coverage or a need for more insurance. Your agent may then suggest ways to fill these gaps. You could also hire an independent financial planner to do such a review if you prefer to get unbiased advice from someone who will have no incentive to try to sell you anything. Regardless of who does this review, you should make it clear that you will be under no obligation to make any further purchases should you agree to have a review.
Returning a Policy
If you find a better life insurance rate quote immediately after purchasing a new policy, don't sweat! Most states have a requirement that a life insurance policyholder can return a newly issued policy within a specified period and receive a complete refund of any premiums paid. This free look period allows the new policyholder an opportunity to review the policy in detail and typically lasts 10 days for a new policy and 20 days for a replacement from the time you receive the policy. You should check with your own state for its provisions or ask your agent.
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