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Can you save money by switching life insurance companies?

We are constantly bombarded with television and internet advertising encouraging us to switch insurance policies in order to save money. With more and more people trying to trim their budgets, this strategy seems sensible. After all, if you could pay less for your insurance premiums, it would make sense to switch companies.

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This may work with auto insurance, which has rates that vary according to many factors. Buying auto insurance at 45 is about the same as buying it at 30. In fact, you may save money by buying a new car insurance policy simply because you are older and more financially stable.

However, life insurance has special rules and exclusions that may end up costing you more money than you save if you switch. In fact, by exchanging your policy for a new one, you could lose the entire value of your investment. Before you give up your current policy and purchase another, be sure you understand all the implications of your action.

Life Insurance Builds Value

Life insurance, unlike other forms of insurance, builds in value the longer you have a policy. If you give up an insurance policy before it matures, you will be entitled to a refund of a portion of what you have paid in. This amount is known as the “cash surrender” value. This value is far less than the face amount of the policy, and will reflect a loss over what you have already paid in, but the cash value may be significant if you have paid on the policy for awhile.

Having to Qualify Again

When you go to buy another policy, you may run into some roadblocks. You will be older than you were when you bought your first policy, and age is a big determining factor in price. Further, you may now have medical issues that you did not have before; this will definitely change your premiums if the company requires a medical exam.

Exceptions that may start over

Further, insurance companies have some built-in exclusions on new policies so that they do not have to pay a claim on a brand-new policy, if possible. A “contestability” clause may prohibit payment during the first two years of the policy, so if you die during that time, your beneficiaries may receive nothing.

Payable Commission

Another factor you should consider is the agent’s commission. This payment is typically calculated during the first year of the policy, and is generally not included in the advertised “price” of the insurance. This means that you might find yourself paying more than you thought for the first year your policy is in force.

What to watch out for?

There are some other warning signs that you might consider as you think about switching life insurance companies. Insurance agencies which advertise prices that are much less than their competitors, do not require health information, and generally seem “too good to be true” are often companies without sound financial standing. Unfortunately, there are people doing business with the public who think only of making a quick commission, and are not concerning themselves with the long-term picture. You might pay a few years of premiums, only to find that the company has dissolved and your beneficiaries will never receive your death benefits.

On the other hand, an old, established company’s prices should be in line with comparable companies. If a company is charging much more than its competitors, you should ask the agent the reason for this increase in price. It is possible that the company offers other services that may be option, and by declining those, you could reduce your price. It is also possible that it is worth the extra money to pay for those services or benefits. The only way to be sure is to compare the companies by talking to the agents and looking at what each offers for the price.

Consider Changing Your Existing Policy

It is also possible that you can reduce your current premiums by examining your own policy. If there are benefits included in your policy that you can sacrifice to save some money, you can talk to your current agent about this. You may even be able to reduce the face amount of your policy if your financial situation prevents you from making the full premium payment. Some companies even offer payment restructuring, using a part of the face value to help you make the premium payments until you can resume full payments on your own.

There are many options you can consider before giving up your current life insurance policy. In most cases, you are better off working with your current company than exchanging a paid-up policy for a new one.

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