Replacement of Life Insurance and Annuity Policies

A replacement occurs when a new policy or contract is purchased and in connection with the sale, an existing policy is surrendered, forfeited, lapsed or otherwise terminated. If premium payments are discontinued, and it is converted to reduced paid-up insurance, continued as extended term insurance, or reissued with any reduction in cash value, it is a replacement. If you borrow, whether in a single loan or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding twenty-five percent (25%) of the loan value set forth in the policy, it is considered a replacement.

Replacing an existing life insurance or annuity policy may not be in your best interest, or your decision could be a good one. You will pay acquisition costs and there may be surrender costs deducted from your existing policy. You may be able to make changes to your existing policy to meet your insurance needs at less cost. A policy loan will reduce the value of your existing policy and the amount paid upon your death. You should make a careful comparison of the costs and benefits of your existing policy and the proposed policy. You can ask the company or agent that sold you your existing policy to provide you with information concerning it. This may include an illustration of how your existing policy is working now and how it would perform in the future based on certain assumptions. Illustrations should not, however, be used as a sole basis to compare policies. Ask for and retain all sales material used by the agent in the sales presentation. Be sure you are making an informed decision.

The following should be discussed with your agent to determine whether a replacement makes sense:

Premiums:

• Are they affordable?
• Could they change?
• You are older – are premiums higher for the proposed new policy?
• How long will you have to pay premiums on the new policy compared with on the old policy?

Policy values:

• New policies usually take longer to build case values and to pay dividends.
• Acquisition cost for the old policy may have been paid; you will incur costs for the new one.
• What surrender charges do the policies have? What expense and sales charges will you pay on the new policy?
• Does the new policy provide more insurance coverage?

Insurability:

• If your health has changed since you bought your old policy, the new one could cost you more, or you could be turned down.
• You may need a medical exam for a new policy.
• Claims on most new policies for up to the first two years can be denied based on inaccurate statements.
• Suicide limitations may begin anew on the new coverage.

If you are keeping the old policy as well as the new policy:

• How are premiums for both policies being paid?
• How will the premiums on your existing policy be affected?
• Will a loan be deducted from death benefits?
• What values from the old policy are being used to pay premiums?

If you are surrendering an annuity or interest-sensitive life product:

• Will you pay surrender charges on your old contract?
• What are the interest rate guarantees for the new contract?
• Have you compared the contract charges or other policy expenses?

Other issues to consider for all transactions:

• What are the tax consequences of buying the new policy?
• Is this a tax free exchange? (See your tax advisor)
• Is there a benefit from favorable “grandfathered” treatment of the old policy under the federal tax code?
• Will the existing insurer be willing to modify the old policy?
• How does the quality and financial stability of the new company compare with your existing company?