What are the costs of exchanging my permanent life insurance policy?

By Insurance.com Posted : 01/01/2011

You might think you can get a better deal by exchanging the life insurance policy, but consider the costs of doing so before taking any action. Make sure the exchange is in your best interests--not just in the interests of an agent trying to sell you a new policy, the Financial Industry Regulatory Authority (FINRA) advises.

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A variety of costs may come into play when you exchange a permanent life insurance policy. Check whether you would be subject to any early surrender charges, which can eat away at the cash value you've built up. The new policy will have its own schedule for surrender charges, which might go beyond the schedule of your current policy.

Life insurance exchange and taxes

If you have outstanding loans against the current policy, you might face tax consequences, FINRA warns. A new insurance policy will also have a new contestability period--the two-year window when insurers can challenge a death claim based on misinformation on the life insurance application. In addition, if your health has declined, you could pay higher premiums for the new policy. Don't forget to account for the new policy's other expenses, such as sales commissions.

Carefully weigh any advantages of a new life insurance policy against these costs, and make sure you understand all the features of a new policy.

Variable and variable universal life insurance policies are considered securities. As a result, brokers and companies selling them are required to provide information about their advantages and disadvantages. Your broker should help you decide whether an exchange is a good idea based on your financial situation, needs and risk tolerance.

For general information on life insurance, see "10 things to know about life insurance."

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