Switching your life insurance: Here’s what to consider

Life insurance can provide you and your loved ones with the peace of mind of financial protection in case you pass away. But life insurance policies are not one size fits all. You may find yourself in a position where you need to adjust your death benefit or select another type of policy that better suits your needs. Your current provider might be able to help you out, or you may find that changing life insurance companies is a better option. Read on as Bankrate explains when to switch your life insurance, what to look for in a new policy and how to determine an appropriate coverage amount.

Changing life insurance companies: reasons to switch

If you’ve already got a good policy, you may be wondering why you would want to switch life insurance companies or the type of policy you have. There could be any number of reasons, including the following:

• Your needs have changed. Perhaps your children have grown and no longer need support, you’ve gotten divorced or your income or estate has grown in size.
• Your current level of coverage is no longer suitable. Maybe you want to switch from a term policy to whole life insurance to obtain permanent coverage. Or, conversely, you’d like to cancel your whole life policy for the simplicity of a term policy.
• You’re changing jobs. You may have switched employers and now need to consider the group life insurance benefits that you were receiving compared to the benefits at your new job and whether you need to subsidize that coverage with a privately owned policy.
• Your policy is ending. You could reach the end of your term policy but still need coverage of some type. Perhaps you want to get a policy with a lower death benefit now that your children are grown, or you only want coverage for your final expenses.
• Your finances have changed. It could be that you can no longer afford the premium payments and need to adjust your coverage or find cheaper coverage. Or, you’ve decided you want to incorporate a cash value policy in your comprehensive financial plan.
• Your loved one’s finances have changed. Maybe you’ve discovered that your beneficiaries will have more (or less) financial need than you thought, so you’d like to change your death benefit amount.
• Your health has improved. If you’ve made positive changes to your health, like quitting smoking or losing weight, since you took out the policy, you may qualify for a better premium.

Whatever the reason, you might find that your previous plan isn’t a plan that you need to continue carrying.

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How to switch your life insurance

Switching life insurance policies or companies may seem daunting, but it doesn’t have to be. Here’s the easiest way to go about it, step by step.

Choose the type of life insurance you want

Before you cancel your life insurance policy, decide what type of policy you would like to replace it with. Specifically, figure out if you want term or permanent life insurance. As you might have guessed, term insurance lasts for a set amount of time.

If you’d like life insurance that lasts your whole life, look into permanent life insurance, which includes whole, universal and variable life insurance products. As long as you continue to pay your premium, you will be covered. Plus, a permanent policy often has additional benefits like a cash value component that might earn you money throughout the life of the policy. Although permanent policies typically cost more than term insurance, they can provide a financial cushion to your beneficiaries.

Be aware that regardless of whether you choose a term or permanent life insurance policy, they are likely to cost more than when you originally purchased a life insurance policy. This is because you’ve aged, and life insurance generally costs more as you get older and are more likely to submit a claim.

Determine how much coverage you need

After you determine the type of policy to buy, you’ll need to decide how much coverage you want. Consider what you want the death benefit payout to cover and how you’d like your beneficiary to use it.

Are you looking to replace your income for your spouse, leave an inheritance for your children or just provide for burial expenses? Do you have debts that you want to make sure are paid if you pass away?

The death benefit amount you choose will depend on what you want it to be used for and how much you can afford to purchase. Again, speaking with a financial advisor or insurance agent could help you determine how much life insurance coverage is right for you.

See if you can adjust your policy instead

After you know what changes you want to make, you can talk to your current insurer or agent to see if your policy includes terms that allow you to make changes to it to make it work for your new needs. It might not be an option, but it doesn’t hurt to ask. Also, depending on the type of changes you’d like to make, you may be able to avoid a health questionnaire or a medical exam, which is not as likely when switching life insurance companies entirely.

Apply for your new policy, if applicable

If you weren’t able to make changes to your existing policy and have decided to get a new one, you’ll have to apply through an insurance agent or online. Many life insurance companies allow you to start a policy quote online, but you might have to work with an agent to complete the process.

Fortunately, with the advancement of accelerated underwriting processes, you may or may not have to undergo a medical exam. In the past, no-exam life insurance typically meant you would automatically pay more for your policy, but that’s no longer the status quo.

Make sure your policy is active

Insurance experts recommend purchasing your new policy and making sure it is active before canceling your old policy. You likely don’t want a gap in coverage.

Make sure you find out if there are any waiting periods with the new policy you’re considering. For example, iIf you are purchasing a guaranteed issue life insurance policy, ask a representative to clarify how the policy is paid out. In some cases, your beneficiaries may not receive a full payout if death occurs during the first two years if it has a graded death benefit.

Before making the switch, learn about other clauses or exclusions that might reset when you change policies. These might include:

• Contestability period: The insurer might reserve the right to contest the claim based on the insured’s application if the insured dies within the first two years.
• Suicide clause: If the insured dies by suicide within the first two years of the policy, the insurer might reserve the right to deny the claim.

Talking with a licensed insurance agent as you go through the process can help you make sure you’re getting what you want out of the switch. Reviewing your current policy with your insurer or agent may also be advisable. Additionally, if you are concerned about your estate or the financial protection of your beneficiaries, you may even want to speak to a certified financial planner to help determine what coverage level is right for your situation.

Things to consider when switching life insurance

When you switch your policy, there are a few tips to keep in mind:

• Check for surrender charges. If you’re canceling your permanent life insurance policy, you might be charged a fee. Although this amount decreases over the length of the policy, you might want to learn how much you’ll be charged before you cancel.
• Pay attention to taxes. Consider the tax consequences of dropping your old policy before committing to a new one. If you’re not sure what these might be, consult a financial expert or tax accountant.
• Know that prices may increase. Premiums on your new policy may be higher, or you may not be insurable under the same conditions based on your age or changes to your health.
• Compare benefits. Look closely at the benefits of the new policies you are considering to make sure that you aren’t losing any coverage that is essential to you.
• Consider changing the policy first. You may be able to save time and money by amending or adding to your current policy instead of replacing it. In order to keep you as a policyholder, your insurer may be willing to make adjustments to your policy, such as switching it from term to permanent.
• Note the waiting period. Most new policies have a waiting period before certain kinds of death benefits become effective. Consider this before replacing your old policy.
• Understand any losses or payouts from your old policy. When you cancel an existing policy, make sure you know any financial consequences of terminating that coverage. If you have a permanent policy, for instance, consider whether it is worth losing the money you’ve already paid into it. It is also a good idea to consider having your new policy in place before terminating your old policy just to make sure you have no lapse in coverage.
• Talk to your current provider. Most insurance companies would like to retain their existing customers. If you are considering changing insurance companies, talk to an insurance agent at your current provider and see if they might be able to draft a policy that meets your needs.
• Double-check for any bundling discounts. If you’re switching insurance providers, realize that you might lose your current bundling discount. For instance, if your life insurance is the second policy on your multi-policy discount, you might see your home or auto insurance go up. However, you might consider whether or not you can move your other insurance policies to your new insurance provider in order to get a bundling discount.

By doing these things, you may be able to avoid mistakes that could cause you to pay more money over time.

Tips for purchasing the right amount of coverage

If you’re considering switching your life insurance and wondering how much life insurance to purchase, the following considerations may be helpful.

• Consider the things that you would like your beneficiaries to be able to pay for in your absence. It’s important to have an idea of what you might want the death benefit to be used for, whether it is to help your child pay for school or to help your partner pay off your mortgage. This will help you better determine the amount of coverage that you need. Using a life insurance calculator can help.
• Consider the monthly premium you can afford. A higher death benefit amount means higher premiums, so taking your budget into account is an important step. Talking with a financial advisor, certified financial planner or licensed insurance agent could help you decide what premium works best for you.
• Consider your overall financial plans. For example, you may want to consider a policy that has a long-term care benefit that could be used if you need to pay for assisted living or a nursing home while you are still alive. This can help protect your savings and other assets like your home that could be at risk if you do not have the funds to pay for long-term care.
• Don’t forget to take debt into account. Debt does not necessarily go away when you pass. For that reason, it’s important to consider any debts that your estate or family members may be responsible for if you pass away. This may impact their ability to use the death benefit for the intended purpose if it has to be used to pay off debts first.

Alternatives to switching life insurance policies

In some cases, you might decide that you don’t want to cancel your existing policy in order to purchase a new one. However, there are still things you can do to get the life insurance coverage that you want.

Check if you can change your current coverage

If your insurance needs have changed since you took out your policy, contact your insurance provider and ask them if it’s possible to make adjustments to your policy. In some cases, your provider might not be able to, but it can’t hurt to try.

Consider your conversion or renewal options

If you purchased a term policy that’s almost at the end of its period and you’ve decided that you would like to remain covered, ask your insurance provider if it’s possible to convert it to a permanent life insurance policy. If that’s not an option, your provider might be able to renew the policy or extend the term for a short amount of time, depending on your circumstances.

Keep your existing policy and purchase a second one

If your financial situation is stable and you feel confident about your future financial needs, you might benefit from purchasing multiple term policies that overlap. This laddering strategy ensures that your coverage is robust and you have a strong financial cushion in the years when you might need it most. For instance, you might purchase a 30-year policy, a 20-year policy and a 10-year policy. As you age, the coverage amounts will drop off, but your dependents will have a larger payout in the early years when you’re more financially vulnerable.

Frequently asked questions

• What is the difference between term life and whole life?

  The most significant difference between term and whole life insurance is that term life insurance covers the policyholder for a set amount of years, usually 10 to 30. Whole life insurance, on the other hand, covers the policyholder for life, as long as the premium is paid (in most circumstances), and also offers a cash value component that you can borrow money from prior to death. Premiums also differ between term and life policies, because a term life policy may expire before any death benefit is paid out while a whole life policy almost always guarantees a paid claim. As such, term policies are typically cheaper and may be seen as a more budget-friendly option, depending on your short- and long-term needs.
  

• What is the best life insurance company?

  The best life insurance company for you will depend on a number of factors specific to your situation. Consider the amount of coverage you need, the term length that suits you best and the premium you can afford. Speaking with a licensed agent or requesting life insurance quotes can give you a better idea of what’s available. Based on Bankrate’s in-depth analysis, MassMutual, Northwestern Mutual and State Farm might be worth looking into.
  

• Is it OK to switch life insurance companies?

  Yes. Many people’s insurance needs change throughout their lives, so insurance providers are usually able to work with you in order to find an insurance product that fits your current and future needs. If you’re struggling to pay the premium, for instance, ask your provider about what options you have before you switch companies. Your carrier might work with you to reduce your coverage amount or convert your policy type.
  

• Does all life insurance require a medical exam?

  While medical exams are common when applying for life insurance, not all companies require them. Many term policies are available without requiring an exam, and because of accelerated underwriting processes, your premium won’t necessarily be any more expensive. You might also be able to purchase guaranteed issue life insurance, although these policies typically have high premiums.
  

• Can I change my life insurance policy at any time?

  You can usually change your life insurance policy at any time, but your provider might charge fees or change your premium to reflect a higher rate. Before changing your policy, contact your insurer to discuss your updated life insurance needs.