When Does Replacement Life Insurance Make Sense?

Replacement Life Insurance and Annuity

Conventional wisdom recommends avoiding replacement life insurance policies. There may be cancellation fees for the existing policy and high costs associated with starting a new policy. For a surprising number of people, however, a replacement life policy fills a need.

Personal Choice

As economic conditions change, some consumers may determine that stock investments, business expansion or big-ticket personal purchases are more important than maintaining the existing life insurance policy. Others may simply feel that their policies are not what they expected, or have underperformed in building cash value.

Economic Pressures

A consumer facing job loss, economic hardship or major expenses may decide that a replacement policy makes sense. The replacement policy will provide coverage, while cashing the previous policy provides some financial relief. Of course, in some cases, consumers may realize they cannot afford to maintain the policy, and turn to replacement life insurance to ensure some level of economic protection for their families.

Family Situation

Empty-nesters, parents whose children have completed college, retirees and people who have lost a spouse may reassess their life insurance needs. They may determine that term life or a whole life policy with a lower premium will better meet their needs.

Ending Premiums

Consumers with substantial value in a life insurance policy may choose to convert to a paid-in-full policy, accepting a lower payoff value in exchange for ending premium payments.

Repaying a loan

People who have taken out loans on an insurance policy may face loan payments in addition to premiums. It can make economic sense to cash out the policy and pay off the loan with the proceeds. Obtaining a replacement life policy with a lower premium and no loan payments can put more money in policy holders’ pockets.

Better Rates and Fees

Consumers may feel they did not get the best possible premium or return on investment with their existing life insurance policy. Replacement life insurance can fill a need in these cases, especially if the existing policy was purchased recently.

New or Old Policies

Fees are generally higher in the first few years after purchasing a policy. Replacing a policy makes the most economic sense in this time frame. Policies that are decades old, on the other hand, may have such low interest rates that they cannot keep pace with inflation.

Special Offers

Life insurance companies may be willing to waive some fees or lower premiums in order to gain business. Taking advantage of such opportunities can significantly reduce the cost of obtaining replacement life insurance.