|
Q: I'm unhappy with the rate of return I'm receiving on my permanent life insurance policy. Should I change or replace the policy for another?
Answer:
First, you should consider the purpose for which you bought the life insurance policy. For example, was it to provide death benefits to your dependents or to serve as the conservative part of your investment portfolio? If you are disappointed with the financial performance of your permanent life insurance policy, you may decide to exchange your policy for another at the same company or replace your policy by taking out a new one with another insurance company. In either case, you must weigh the potential for greater returns against the costs associated with switching policies. Ask either your current insurance agent or a new independent agent to assist you with the needed research and comparisons.
Your unhappiness with the rate of return you're receiving may be a legitimate reason for exchanging or replacing your policy. But it would make little sense to purchase a new policy containing a higher investment return if those higher proceeds are offset by increased fees. For instance, when you purchase a new policy, new agent commissions and transaction fees are generated, reducing the growth of your policy's cash value over the first several years. When you cancel your old policy, you may also be required to pay a surrender charge to compensate the company for deferred expenses.
Keep in mind that when you switch to a new policy, you may end up paying a higher premium if your insurance company requires you to take another medical examination. Another medical exam will almost certainly happen if you're replacing your policy with one at another company, and it may happen if you're exchanging your policy through your current insurance company. Because you are now older, you may pay a higher premium for your new policy, especially if medical problems have arisen since your old policy was issued.
Before exchanging or replacing your current policy, ask your insurance company if there are ways to modify its provisions to result in a better rate of return, such as reallocating the investment subaccounts in a variable policy or reducing the number of riders (e.g., dependent coverage). But if you do decide to exchange or replace your policy, make sure that the new policy is issued before terminating your old one. Otherwise, you may be left without the coverage you need if your application is declined. The tax code allows you to exchange one life insurance policy for another without triggering current tax liability. However, you must follow the IRS's rules when making the exchange.
|
|