Is there any issue with cancelling my current life insurance policy and getting a new one?
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Asked April 15, 2013
Instead of canceling a life insurance policy, it might be more beneficial to simply increase the amount of coverage you have, or to purchase a secondary policy. There is nothing wrong with canceling a policy if you no longer need it, but if you are simply trying to increase or decrease your total coverage, buying a supplemental policy may be the best option.
If you are planning to cancel your life insurance altogether, and then purchase a new policy, look at the costs before you do so. Keep in mind that you will have to qualify for the new policy all over again, and that you are older now than when you purchased the original policy. Since your age is a large factor in determining your premiums, the new policy may turn out to be a lot more expensive than the one you are giving up.
If your current policy is a term life insurance policy, it might be better to convert the policy to a permanent life policy. Not all term life policies are convertible, and there are costs associated with converting a policy. If your policy is not convertible, it might be better to simply keep the term policy in force and add a permanent life insurance policy to go with it. There is no limit to the number of life insurance policies you can have, and any time your insurable interests increase, purchasing additional coverage is a good idea.
Most insurance agents will advise you to think carefully before you cancel an existing policy. If your health has changed since you bought the existing policy, you may find out that purchasing a new policy is more difficult than you anticipated, or completely out of the question. Additionally, you are going to experience a transitional period after you cancel the existing policy. During this period, called the contestability period, the insurance company is entitled to terminate the policy if errors or inconsistencies in your application are found.
If you are thinking of canceling a permanent life insurance policy with accrued cash value, things are a little more complicated. To compare the new policy you are considering with your existing policy, use the interest adjusted index method. This method has been developed by National Association of Insurance Commissioners (NAIC), and has been adopted for use in most states. This index consists of two parts, Net Payments and Net Surrender, and can be used to accurately compare two policies of different ages and values. Insurance agents are required by law to provide you with a cost disclosure form and cost indexes that will allow you to compare the policies side by side and make a more informed decision on the value of the conversion or cancellation.
Answered April 15, 2013 by Anonymous