Switching Life Insurance Policies? Watch for These Pitfalls
Most people buy and keep life insurance for the duration of the term. But, if you find a policy that will save you money or if you encounter major life changes that alter how much insurance you need for those dependent on you, you might have good reason to make a switch.
This process is full of potential pitfalls that could leave you with no life insurance at all, so use these tips when you change policies.
1. Avoid Lapses in Coverage
Unfortunately, many life insurance shoppers apply for a different policy, assuming there will be no problem with approval. They then cancel the old policy before the new one is in place. This can leave you uninsured during a short interim — or a long time — if new risk factors have made it harder for you to qualify for an affordable policy. For these reasons, you should never cancel your old insurance policy until the new one is in effect.
2. The Smart Way to Switch
The smartest way to switch life insurance policies is to apply for your new policy and simply stop paying the old one after the new coverage begins. The old policy includes a grace period, usually 30 days, in which coverage will stay in place. It wonâ€™t hurt your credit rating and it offers an extra layer of protection during the grace period.
3. Donâ€™t Forget the Two-Year Exclusion Clauses
When you begin a new life insurance policy, certain exclusions apply for the first two years of the policy. This time is called the â€œcontestability period.â€ If errors, omissions or falsehoods are found in your life insurance application, a claim made during that period could be denied. After the two years, the insurance company loses the right to contest the information as a basis for claim denial.
Armed with this information, you should re-evaluate the type of insurance you decide to buy as well. For most of us, term life is the simplest and most affordable type of life insurance, but options like whole life insurance are good for those planning an estate. Talk to a qualified insurance agent to help you decide which type of policy is best.
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