Changing Life Insurance Companies: What You Need to Know

With some life insurance companies, you can change your coverage with a life insurance policy conversion. If you’re happy with the life insurer you have now, then it's worth asking about options to change your coverage while staying with the company. But if the insurer you have doesn't offer the coverage you now want, you may need to switch companies to get it.  

Although changing life insurance providers isn't a decision to be made hastily, it's possible to do so. And, if you take some precautions first, you can make the change without risking coverage gaps. 

Why people switch life insurance companies

As life changes, so can your insurance needs. The policy you bought in your 20s or 30s may not be right for you now. Below are some of the most common reasons people decide to switch life insurance policies. 

Life events

If you get married, have a child or buy a house, your existing policy may not provide sufficient protection. You may need to increase your coverage limits so that, were you to pass away, your family could afford to pay off the mortgage or cover your child's college education. 

Alternatively, you may need supplemental or additional coverage. If you have life insurance through your employer, you may get free or low-cost coverage up to a certain percentage of your salary. While that's an excellent benefit, it may not be adequate for your family's protection, and you may need additional coverage to care for your partner and dependents. 

Coverage and benefits

Sometimes, you may need to adjust the coverage type. For example, if you purchased a basic term life policy, you may decide to switch to a whole life policy to take advantage of permanent protection. Or you may want insurance endorsements that your current policy doesn't include, such as waiver of premium for disability or a terminal illness rider. You’ll need to switch policies to get those protections. 

Finances

Over time, your financial situation can change, and prompt a switch of insurance policies to get a premium you can afford. For instance, whole life policies tend to be significantly more expensive than term life policies since they provide permanent coverage. If your finances continue to tighten, you may need to opt for a term life policy instead to reduce the premium you pay. 

Streamlining coverage

Managing multiple insurance products from several different companies can be labor-intensive and lead to errors, like failing to pay premiums on time. Consolidating your insurance policies under one insurer can make it easier to manage your accounts and, as an added benefit, you may qualify for multipolicy discounts.

Key considerations before you change your life insurance

If you've decided to switch insurance policies, there are a few considerations to keep in mind.

Review your existing policy

Review the terms of your current policy. In some cases, canceling it will require you to pay a cancelation fee, typically known as a surrender fee or surrender charge. If you had a permanent life insurance policy that built cash value, the surrender fee is typically deducted from your cash value.

Term life insurance policies are usually simpler to cancel. Once you stop paying your premiums, your coverage ends. But it's still a good idea to review your policy contract to avoid any surprises. 

Compare new policy options

Work with an insurance agent or various insurers, or use a life insurance calculator, to determine how much coverage you need for your family member's peace of mind.

Consider different coverage amounts, insurance endorsements, and insurance types. If you want a relatively inexpensive policy to protect your loved ones, a term life policy may be sufficient. But if you want lifetime protection and the ability to build cash value, a whole life insurance policy may be a better choice.

Then seek quotes from at least three insurance providers, to be sure you’re getting the best rate and range of coverages for your needs. 

Evaluate the financial strength and reputation of the new company

When you purchase life insurance, you're putting a lot of trust into the life insurance company. You want to be sure the company is financially sound and able to afford current and future claims. 

Checking a company's AM Best financial strength rating — a rating issued by this rating agency focused on the insurance industry — is an excellent way to ensure a company is stable. Ideally, you want a company with an AM Best rating of at least A+ (Superior).

The process of switching life insurance

To switch life insurance companies, follow these steps: 

Step 1: Apply for the new coverage first

Before canceling an existing life insurance policy, apply for new coverage first. Depending on the type of coverage you want, your age and your health, you may have to go through the full underwriting process, meaning you'll have to undergo a medical exam and bloodwork. (Even if these steps are not required, electing to complete them may result in a lower premium and other pluses.)  

Step 2: Review the new policy thoroughly

You’ll be sent your policy, which will be based on the information you provided or the insurer gathered. Review its terms, coverage and premiums to make sure it fits your needs – including your budget. 

Some key items to examine include: 

• Policy effective date: Life insurance policies may not go into effect right away. With some companies, your policy may not start until the first of the following month. 
• Contestability period: Most policies have a contestability period on the insurer's part. If you were to pass away during the first two years of being insured, the company can deny a claim if any of the information you submitted on your application was incorrect. 
• Exclusions: Review what isn’t covered by your policy. Some policies won't pay out the policy death benefit if you die due to participating in high-risk sports, for example, or if you take your own life within the first two years of the policy. 
• Coverage limit: One guideline often used to determine the death benefit for life insurance is that your policy should cover at least 10 times your income. But, depending on your circumstances and your health, that amount may not be adequate or affordable – or even possible. Talk to your insurance representative about your coverage needs and options. 

Step 3: Cancel the old policy only after approval

Cancel your existing policy only after the new life insurance policy is approved, the first premium is paid and the policy is active. Otherwise, you risk having a coverage gap. 

Potential risks and how to avoid them

Switching life insurance policies can be a good idea, but problems can arise. 

Difficulty getting coverage

When you're young and relatively healthy, getting coverage is easy; you can often get a policy without a medical exam. But as you age or develop health issues, getting life insurance can be more challenging. You'll have to undergo medical exams and, with some health issues, you may struggle to find a company willing to cover you at all. 

Higher premiums

Policies tend to be less expensive for younger adults. As you age and your health changes, you'll likely have to pay a higher premium for coverage.

Higher premiums may be inevitable, but you can minimize the increase by talking to your agent and asking about potential discounts. 

Tax consequences

Switching life insurance policies can have tax consequences if your policy has a cash value. The IRS may view the payout of the surrender value as taxable income. Before canceling an existing policy, talk to an accountant or financial advisor to assess how canceling the policy will affect your taxes. 

Loss of benefits

Some older policies may have added benefits and insurance endorsements that aren't commonly available in products now. For example, an older policy may include a long-term care rider, which you'll lose when you switch policies. 

You may need to buy a separate insurance product to get the same coverage if you change policies.