Switching life insurance providers: is it worth it?

Key takeaways:

• A new policy means a new medical exam, which could lead to a higher premium.
• If you switch life insurance providers, you’ll face a new two-year contestability period.
• Switching to a new provider means you will have to pay the upfront fees again.
• Your current provider is likely able to convert, replace or supplement your existing policy to achieve coverage that meets your needs.

When you plan for the future, a key step in that process is the purchase of a life insurance policy. However, if time has passed since you first bought it, you may begin to wonder if you should reevaluate. Perhaps there are cheaper policies available, as well as ones that might provide more extensive coverage. But switching life insurance providers isn’t as cut and dry as you might think and rushing to change policies may not be in your best interest. Here are five things to consider before switching to a new provider.

1. New medical exam

Medical exams are a standard part of the life insurance application process.¹ Unfortunately, you won’t be able to carry over the results from your existing policy to a new one. After all, the new provider will have to consider your current health status (along with your medical history). This means any new health issues could be taken into account, potentially leading to a more expensive policy. Or it’s possible a new company might even deem you uninsurable.²

2. A new contestability period

Switching providers means you’ll once again be beholden to a contestability period, which stipulates that if a policy holder passes away within the first two years of purchasing their policy, the insurance company has a right to investigate the claim before paying the beneficiary. Although unlikely, the carrier may be able to deny a claim outright or deduct any premiums they would have charged if they have reason to believe the information provided by the customer was incorrect. In these instances, the carrier may be able to deny a claim outright or deduct any premiums they would have charged in light of this additional info.³

3. Paying upfront fees...again 

Life insurance carriers often charge customers fees when they first issue a policy. You’re likely to face these upfront costs again should you switch providers. As you weigh these financial ramifications, bear in mind that it often takes time before the revenues you would receive from the policy outstrip these fees.⁴

4. Potential tax burdens

There’s always the chance that a change in your life insurance policy will result in new taxes. For example, if you transfer ownership of your policy to another party and name a third individual as the beneficiary, the payout will be viewed as a gift from the policy holder to the beneficiary and moreover liable for a gift tax. Moreover, if you decide to sell or surrender your original policy, the cash value might eclipse the policy value. In that scenario, the difference will be taxable.⁵

5. Possibility of policy conversion

Even if you’re unsure about your current life insurance policy, you don’t necessarily have to make a complete switch. Talk with your agent and see if it’s possible to replace or convert your policy. There may also be an opportunity to simply add a supplement to get the coverage you want. By going this route, you should be able to bypass a new medical exam and a contestability period.⁶

Changing life insurance providers is something that requires a lot of thought. Take time to research whether a potential provider aligns with your goals and values – and makes you feel confident in their expertise, security and stability. John Hancock is among the highest-rated companies for financial strength and stability, as judged by the major rating agencies.* John Hancock has a suite of solutions that can be tailored to your evolving needs – including their Vitality Program which rewards you financially for healthy living.

Citations:

1 Policygenius: “Everything You Need to Know About the Life Insurance Medical Exam” by Nupur Gambhir & Rebecca Shoenthal, September 24, 2020 (updated) https://www.policygenius.com/life-insurance/life-insurance-medical-exam/
2 The Balance: “What You Need to Know Before Changing Your Life Insurance Policy” by Mila Araujo, April 28, 2020 (updated) 
3 Nerdwallet: “The Life Insurance ‘Contestability Period’ Explained” by Barbara Marquand, May 25, 2016 https://www.nerdwallet.com/article/insurance/life-insurance-contestability-period
4 Bankrate: “Switching Your Life Insurance” by Mary Van Keuren, August 7, 2020  https://www.nerdwallet.com/article/insurance/life-insurance-contestability-period
5 Nerdwallet: “Is Life Insurance Taxable?” by Georgia Rose, July 8, 2020 https://www.nerdwallet.com/article/insurance/is-life-insurance-taxable
6 The Balance: "What You Need to Know Before Changing Your Life Insurance Policy" by Mila Araujo, April 28, 2020 (updated) 

Vitality is the provider of the John Hancock Vitality Program in connection with policies issued by John Hancock.
 

Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595.
 

*Financial strength rating of A+ by A.M. Best

Financial strength rating is subject to change, and applies to John Hancock Life Insurance Company (U.S.A.) and John Hancock Life Insurance Company of New York as a measure of each company's financial ability to pay claims and to honor any guarantees provided by the contract and any applicable optional riders. Financial strength ratings are not an assessment, recommendation, or guarantee of specific products and their investment returns or value, do not apply to individual securities held in any portfolio or the practices of an insurance company, and do not apply to the safety and performance of separate accounts.
 

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