It seems I could have been a bit clearer in explaining the replacement scenarios in last week’s email, so I will give it another try.
It is relatively easy to determine if a term policy should be replaced, as there are few moving parts, so to speak. The comparison is basically premium to death benefit; if there is an opportunity to procure a new policy with the same face amount and a lower premium, you might want to consider it.
I say might want to because there are still a few things to consider. The first is obviously the companies involved. How do they compare in size, and do the ratings agencies look upon them similarly? The second is the term. If you are two years into a 20 year term policy, that policy is not comparable to a new 15 year term policy, unless your objectives have changed in the last two years (unlikely, but not impossible).
The third thing to consider when contemplating replacing your term policy is the purpose of it. If it was procured with the intent of converting it to a whole life policy at some point in the future, you should consider the conversion options of the new policy and company (some companies limit the policies which can be converted to).
The area where I wasn’t crystal clear last week was in replacing permanent policies. Because they have cash value to consider, the decision of whether to replace could be a bit more complicated than with term replacements.
The easy case is if you have a whole life policy from a top rated company; you probably shouldn’t replace it. And the longer it has been in force, the lesser the likelihood that replacing it makes economic sense. Even if your objectives have changed, there are many options available that would make replacement unnecessary.
Variable life and universal life present a more difficult case, as both require a thorough analysis before deciding if replacement is in your best interests. Variable life policies are particularly troublesome, because most of the in force ones that I’ve seen are woefully underfunded.
The decision to replace an in force policy should never be taken lightly. When in doubt, request additional information and/or speak with a trusted advisor. A general rule of thumb is that whole life policies from top rated carriers should seldom be replaced, while any permanent policy with a lower rated company should be reviewed thoroughly.