Life insurance watch list
You are right to be suspicious when a life insurance agent recommends that you replace an existing policy. Many replacements are not in your best interests. However, in some cases it does make sense to replace an existing life insurance policy.
At the present time, this watch list does not focus on specific products. You can find some suggestions in that area at www.peterkatt.com.
This is a list of general groups of policies that may be candidates for replacement. In each case, the chances of striking oil are high enough to justify exploration.
You must look at your particular situation to decide if your policy should be replaced, but you win either way. If it should be replaced, you'll have a better policy. If it shouldn't be replaced, you'll have a better understanding of what you own.
There is also a section of policyholder alerts, which are more specific and deal with a wider range of issues.
General groups of policies
- Term insurance policies purchased more than a few years ago. Prices have dropped a lot in recent years, so it's a good time to check what you're paying. Example: In 1997, a very healthy 40-year-old woman would have paid $368 a year for one leading company's $250,000 15-year level premium term policy. Five years later, that same company would have charged the 45-year-old woman $305 a year for a 10-year policy, and she could have paid even less at some other companies. Rates are even lower today.
During the next few years, individual states will be adopting the 2001 Commissioners Standard Ordinary (CSO) mortality table as the basis for determining life insurance reserves. This table generally results in lower reserves for new policies, so prices for term insurance should continue to fall.
- Universal life policies with a credited interest rate of 4% or less. If the current low interest rate environment continues, many companies will eventually pay a lower interest rate, and some may pay only the guaranteed minimum interest rate (typically 4%). If your company is already paying only the minimum rate, you may have a lemon that is squeezing you for juice.
- Policies issued by a company that has been taken over by another company. When bigwigs acquire a company, they sometimes have a plan in mind to wring more profits from the existing policies. Good for them, bad for you. You should put your policy on probation and get in-force illustrations every year to track performance. Don't replace your policy rashly. Sometimes this is a false alarm.
- Policies issued more than 20 years ago on insureds who are now in their late 60s and older and who are still in good health. The issue here is the difference between "select" and "ultimate" mortality rates. When you apply for life insurance, the company has an opportunity to check your health. This medical selection process screens out unhealthy applicants, so the accepted applicants have a lower chance of dying in subsequent years. This effect gradually wears off over 15 to 25 years. By re-applying for life insurance, you can put yourself in a new pool of healthy insureds, and the cost of your coverage will reflect the difference between select (i.e., related to insureds whose healthy has recently been checked) and ultimate (i.e., not recently checked) mortality rates. This savings will be partially offset by new acquisition costs, including selling expenses (commissions and other costs), underwriting and administrative costs, and state premium tax.
These companies are in the process of demutualizing or are seriously studying it:
- General American
If you drop your policy or if you sell it to a third party (such as in a life settlement), you may forfeit your share of demutualization distributions, so look before you leap. For more information, go to Mutual Company Reorganizations. If your company has converted to a mutual holding company, you will not receive any stock or cash immediately, but you should not drop your policy without considering the possibility that the company may proceed to a full demutualization in the future.