In last weeks article I talked about how I got rid of my old life insurance policy to pay off my credit card debt and save my financial butt. This week I plan to cover the other side of this story, how to switch life insurance policies the right way, because believe it or not their are some big land mines involved when switching policies and if you don’t know about them they could be costing you big.
On top of that I will walk you through the step by step process of switching your policies out and making it a smooth process for you, but first I want to cover the reasons why you might want to switch out your life insurance policies in the first place.
Why You Should Switch
First off, if you’ve been considering the idea of switching let me start by saying you need have a good enough reason because your insurance agent is going to ask you this question. For example if you are switching from a term policy to a different term policy you will not be able to do it. Now this isn’t to say you couldn’t get additional term coverage from a different company, that is perfectly fine.
The reason you can’t do this is because you can’t base your reasoning to switch on the basis of cost or because you don’t like a particular company. So what reason can you switch your policy for?
The best reason to switch a policy is to go to a different type policy. For example in my case I went from a variable universal life insurance policy to a term life policy because of two major reasons.
- Term Insurance Is Cheaper Than Variable Universal Life. When it comes down to it term is far cheaper than a policy that has a cash value account tide to it. With a term policy I was able to go from a $300k death benefit to a $500k death benefit and pay $24 less than what I was paying before that.
- I Needed The Money From The Cash Value Account. Secondly, I’m not a big fan of cash value accounts. Nothings worse than having an account that you can’t use, with a term policy I don’t have to worry about all my money being locked up in some account that I’m never get to use.
So before you decide to switch make sure you have a valid reason.
Finally, I want to mention before you switch you will want to have your new policy up and running before you surrender your old policy. The reasoning for this is because you don’t want to find out that you can’t get the new coverage because of some medical reason.
2 Things You Need To Beware Of When Switching
Finally, before you switch there are two very important things you need to consider before you switch, I’m mentioning these to 2 things because if you don’t pay attention to these critical factors it could cost you big time and that is the last thing I want to have happen to you.
Taxes. The first thing you need to be aware of is the fact that you will owe taxes on any gains you have earned if you are closing out a life insurance policy that has a cash value account. So before you decide switch make sure you consult with your accountant and insurance company and see how much you just might owe in taxes.
Surrender Penalty. The second situation you will want to be aware of is if their is any surrender penalties. Typically surrender penalties can last as short as 4 years or as long as 15 years. In my case my surrender penalty lasted 10 years, on top of that when I surrendered my policy it still had a year to go and I actually ended up losing $200 because of it.
However when you consider the fact that if I would have waited 1 more year and paid 24% interest on my credit cards I actually would have paid more so losing $200 was actually a gain in a way. So before you surrender your policy make sure you ask the insurance company if their will be any surrender charges.
How To Switch Life Insurance Policies
Now that we have a valid reason for switching, and know some of the basic pitfalls, their are some simple steps you need to follow in order to switch to a new policy the right way.
Step 1: Contact Your Life Insurance Agent. The first thing you’ll want to do is contact your insurance agent, whoever that may happen to be. Here you will want to decide the type of policy you want to go with and how much coverage you will need.
For me I went with a term policy, and the reason I did that was because it was far cheaper than going with a variable policy. However I’m not a big fan of term life insurance either because I don’t like to pay into something that I may not get a return in, so why did I go with a term you might ask.
The reason I switched to a term policy is because I added a special rider to the policy called a return of premium rider that will basically pay me all the premiums I pay in to the policy over the next 30 years. This way if I don’t have use the policy in that time, which I hope I don’t, I’ll be able to get all my money back minus the cost of the riders.
On top of that once the term is up I can also switch to a paid up policy if I still want to keep my coverage going and it won’t cost me a penny more.
Finally you’ll need to determine how much coverage you really need as well. Below is a simple calculator I added to help you determine how much life insurance you really need.
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Step 2: Review The Quotes & Complete The Paperwork. Once you’ve determined how much coverage you need and the type of policy you want to go with you will want to review the quotes that your insurance agent has prepared for you.
I know for me I was pleasantly surprise at how much I could save because I switched to term policy. From here you will need to complete the basic life insurance application and sign a few papers to get the underwriting process started.
You will also have to pay the first month or two of premiums of the policy but if the policy doesn’t work out they will refund your money if needed. Finally, you will also receive a temporary insurance coverage certificate till the policy has completed the underwriting process.
Step 3: Complete The Medical Exam. Once you’ve completed the application you will need to schedule your medical exam. In most cases someone will contact you to complete the exam in few days after completed the application.
To complete this exam you will have to answer some basic questions, give a urine sample, and do a blood draw. In all it should only take around 15 to 20 minutes per person.
Step 4: Receive Your New Policy. Finally once you’ve completed the medical exam the underwriters will review all the information and determine exactly what class you fit in. In my case I actually was able to be rated the highest rating which ended up saving me a few bucks.
Once the policy is done your insurance agent will drop off the policy, however before you can get your policy you will typically be asked if anything has changed since you last talked. In my case my wife ended up have gallbladder surgery during this time and it ended up slightly delaying her policy being issued.
In the end if you follow the tips and the basic steps I’ve laid out above you should do just fine when switching to your next policy.
Are you thinking about switching life insurance policies?