Should I Replace My Life Insurance or Annuity Policy?

by Richard F. O'Boyle, Jr., LUTCF, MBA

Life insurance and annuity contracts are intended to be medium- to long-term agreements. Term life insurance policies often have 20-year durations, and many annuity contracts have 8-year surrender periods. But in some cases, it makes sense to cancel or replace a contract with a new one. When should you cancel or replace your life insurance or annuity policy?

You may consider making the change if:
- The term is expiring on your old policy and the rate is sky-rocketing;
- Your health has improved from the time when you originally applied for your policy, for example, you may have quit smoking, lost a lot of weight, controlled diabetes, or passed five years after cancer. Many companies will allow you to take a new medical and keep the existing policy with a new lower rate;
- The rate on a permanent policy may have become unaffordable and it is at risk of lapse. Consider reducing the death benefit (and thus the premium) or using cash values and dividends to pay the premium over the short term;
- Companies change the contract terms on newer policies for Universal Life from time to time. Consider switching to a different UL policy if the crediting interest rate or guaranteed minimum are better or if the monthly costs of insurance are lower. Keep in mind that as you get older your underlying costs get higher;
- A 1035 exchange allows you to transfer the cash values of a life insurance policy or annuity contract directly into a new contract without exposing the cash to taxation. Again, make sure that the terms of the new contract are more favorable. With an annuity, you should check the guaranteed minimum interest rate, since on older contracts it may be much higher.

New York requires a lengthy process to replace a life insurance or annuity contract. This is designed to ensure that both you and your agent “do the math” to make sure the new policy costs are fully disclosed, that the new policy is suitable for your needs and you both quantify the costs and benefits before changing plans.

When considering replacing or cancelling your life insurance policy, keep in mind that by starting a new policy, you have a new two-year “contestability” period where there might be limits on the payout of the death benefit. Never cancel a policy until the new policy is in force, even if it means paying premiums for both policies for one month.