Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York
Life insurance gives you the opportunity to take care of your loved ones after you're gone. Just like home and auto insurance, it offers peace of mind in knowing that your beneficiaries will have financial security.
But you might start to wonder if there's better financial security on offer with another insurance company. Maybe you see a commercial that advertises better rates, or maybe you're curious about what other options are out there.
Can you switch life insurance companies? Of course. Keep in mind, though: While you're always free to change life insurance companies, there are risks of changing life insurance. If you're thinking about shopping around for a new provider, consider the following.
Why would you think about switching companies?
If you've already got a good life insurance policy, why would you think about changing companies or switching up your policy type? There could be a variety of reasons:
Your needs have changed.
As we get older, our lifestyles can change. Maybe the coverage level that suited you in your 20s doesn't go far enough in your 30s and 40s. Or maybe you've experienced a life event such as getting married or having children.
Your term ended.
You may consider switching when you've reached the end of your term policy or guaranteed period. If your policy is approaching an expiration, guaranteed period or end date, you may realize you still want and need coverage.
Your payments are too high.
Do you feel like your premiums are too high? Are you paying for more coverage than you need? If so, it may be time to consider a switch.
You want cash value growth.
If you are seeking cash value growth in your life insurance, and you may find a new policy can provide better accumulation rates.
Whatever the reason, there are times in life when we feel our previous policies aren't offering the coverage we want. If that's the case, you want to study all your options carefully.
The risks of changing your life insurance company
As you consider a new insurance company, keep in mind that making a switch could have a negative impact. Any time you make any kind of change, there's a risk — even if you're simply changing coverage with your current provider.
There are the obvious risks, like higher fees that might offset a lower premium. Or less obvious risks, like having to undergo a new medical exam to qualify for new coverage. One of the biggest risks is a gap in coverage, which is why you don't want to cancel your existing policy until your new policy is in place. Just because you've been quoted a policy price or premium doesn't mean the company will actually approve you for that rate.
Read on for a better understanding of the risks of changing life insurance — and how to think through your next move.
You might need a new medical exam.
Getting a new life insurance policy means you might have to prove to a new company that you're healthy. The younger and healthier you are, the better your rate. If you first got life insurance in your 20s or 30s, you likely were in better physical shape than you are today, years later — that's what happens as we age.
Depending on the policy type, the new insurance company might require a complete medical exam. That could include bloodwork, a urinalysis, checking your blood pressure, and measuring your height and weight, among other things.
If you've developed new health issues over the years, you might find that the medical exam affects your premium rate in ways you weren't expecting.
The clock starts over.
Most life insurance policies come with a contestability period. This is the timeframe during which the insurer can conduct an in-depth investigation if you die. The contestability period is the first two years after the policy is issued.
If foul play is suspected as a result of the investigation, the insurer might be able to deny the claim — meaning your beneficiary will not receive the death benefit. Many insurance companies have these rules to prevent fraud. So, if you switch insurance companies or change policies, this contestability period would start over again.
With certain guaranteed issue policies, it is common for there to be a designated waiting period after the policy has issued. This means the death benefit will be limited or potentially nothing if the insured person dies during this period. This prevents folks from cashing out on a life insurance policy when end-of-life is near.
There are new fees.
Depending on the type of policy you select, you might have to pay a new round of fees. Insurance carriers usually have different fees, like maintenance fees, which could affect your bottom line.
Fees vary by policy and usually aren't as common on a term life insurance policy. But you'll have added expenses with permanent life insurance policies. For example, most permanent insurance policies include cash value surrender fees and maintenance fees. These are charges for maintaining the subaccounts for variable and variable universal life.
When you're comparing the prices of different policies, these expenses might not be as obvious as other fees. Be sure to read the fine print carefully so you're getting the full picture.
It may create a taxable event.
When considering a switch of permanent insurance, not only do you need to consider the potential fees, but you need to pay attention to taxes. This is due to the cash value being tax deferred.
The IRS rules can allow you to exchange a whole life or universal life insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the earnings of the original contract through a 1035 exchange.
But it's not that simple. Anytime you're considering replacing one life insurance policy with another, there's some additional due diligence involved - even when it's a 1035 exchange. Anytime you're using proceeds from the existing policy to buy a new policy, it may create a taxable event.
Although this could be a benefit in certain situations, canceling, replacing or exchanging a life insurance policy may cost you money.
Trust in the company
A life insurance policy is a contract between you and the insurance company. You're promising to pay the premiums, and in return the company promises to pay the agreed amount of money to your beneficiaries when you die.
Remember that a promise is only as strong as the people — or companies — making it.
Not all insurance companies are created equal, and sometimes you get what you pay for. Before you purchase a life insurance policy, do a little research to ensure the insurance company is financially sound.
Life insurance companies paid out $100 million to life insurance beneficiaries in 2021, according to the American Council of Life Insurers "Opens in a New Window". See note 1 Making sure the insurance company you buy a policy from has the financial resources to stand the test of time is good due diligence.
When does switching companies make sense?
In some situations, switching life insurance carriers makes sense, despite the risk. For example, if you're in relatively good health and are able to acquire a policy with coverage that stacks up against your existing policy but at a better price, it might be a good move.
Likewise, there are scenarios where switching life insurance companies can help you acquire coverage that better meets your needs. Whether it's coverage amount, riders and benefits, or better financial strength, these considerations must be made against the risks.
Keep in mind that, you might not need to change companies to meet your changing needs. Your current life insurance provider might offer different types of policies, or your term policy might be eligible for a conversion.
Sometimes it may even make sense to add a new policy rather than lose the features of the existing policy. Consider this rule of thumb as you debate any change: Will making this change put you and your family in a better financial position?
In summary, follow these steps before changing life insurance companies:
- Review if your situation warrants the need to switch insurance companies.
- Make a side-by-side comparison of illustrations for the existing and new policy.
- Consider the pros and cons of losing your existing life insurance policy.
Bottom line, this is not a do-it-yourself decision. You should seek input, and consider a second opinion, from an experienced and licensed professional before making a switch.
Need to talk to a life insurance professional today?
Speak to a USAA representative at 800-531-5433.