Be wary of offers to 'replace' your current policy

Here are some examples for term life insurance:

• Term insurance rates are lower now than they were several years ago, so your new premium may be lower. (See "Now' s time to buy term  life insurance.")

• Companies vary widely in price for the same amount of insurance for one person, and you may not have gotten the best deal the first time around.

• A new term life insurance policy may allow you to lock in a longer guaranteed premium.

• Your needs may have changed. Perhaps when you purchased the old policy, you thought you needed it for five years, but now you need it for 15 years. The new 15-year guaranteed premium may be cheaper than that of your old policy. Even within the same company, rates may have dropped, and new annually renewable term policies may be less expensive than older equivalent policies.

The benefits of replacing a permanent life insurance policy are less obvious:

• Your needs have changed (or maybe you were sold the wrong policy in the first place), and you need term instead of permanent insurance because you need the death benefit for only 10 years.

• You purchased a permanent insurance policy that you did not understand, and you find that you have a variable life policy, when what you really wanted was a whole life policy where there are guaranteed cash values and you don't have to make any investment decisions.

• You want to wipe out a large loan on the old policy by using its cash value.

• You purchased a permanent life insurance policy from a company that's not financially sound.

• You purchased a policy in the 1970s or before, and the guaranteed returns of 2% to 3% are so low that replacing them with new ones actually does make sense.

• You're in the first three years of a permanent insurance policy for which you paid commissions and determine you'd be better off starting over with a new low-load, no-commission policy.

Comparing old and new

When comparing an existing permanent insurance policy with a new one, your agent must get an "in-force ledger" (detailing how your existing policy is expected to perform from now on) and compare the cash values and death benefits, year for year, with the new policy.

You need to compare calendar years, not years of the policy. If you have owned a policy for five years, do not compare the fifth-year values of the old policy with the fifth-year values of the new policy. Unfortunately, this is a sales technique that has often been used to persuade life insurance owners to switch policies.

Replacement analysis

Replacement is a complex issue, and it may seem impossible to tell when it's right for you. The Society of Financial Service Professionals developed a replacement questionnaire to help life insurance agents and financial planners determine whether replacement is a good idea.

This is a guide for the salesperson, but it's also useful for fee-only planners. The replacement questionnaire is a comprehensive analysis of the existing and proposed policies. Unless it's obvious why a replacement is needed, ask your agent or planner to complete the questionnaire based on new illustrations for the current and proposed policies, and then to show all three documents to you.

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Showing their true colors

The analysis can take several hours, so if someone is just trying to make a quick buck, that should end the conversation fast. Also, you may not want to pay hourly fees to a fee-only financial planner to do the analysis. And if a salesperson says, "You don't need to go through all of that," you should leave immediately.

The final issue to consider is whether your old policy has important tax-savings provisions that have been grandfathered in from any tax changes in subsequent years. The replacement questionnaire lists nine such grandfathered provisions. The changes could be worth thousands of dollars to you.

The insurance industry has come a long way from turning a blind eye to the replacement excesses of the 1960s, '70s and '80s. Most say it's probably not in the best interest of the client to replace an existing policy. Your best bet is to heed the words of the Society of Financial Service Professionals -- unless there is clear proof that a replacement policy is a better deal, stick with what you've got.

Updated Sept. 23, 2009

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