ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, June 24, 1996 TAG: 9606240128
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
Your insurance agent may call and suggest you replace an existing policy with a new one. Or, more likely, another agent tells you he can save you money by using the cash in your current policy to buy term insurance.
Should you do it?
Like most financial dilemmas, the answer is that the decision depends on your situation.
"Much as many would like to make it so, the matter of term versus permanent [insurance] is not black or white," said James A. Ford, a chartered financial consultant with Northwestern Mutual Life in Roanoke.
"No one type of insurance is right" for everyone, according to F. Courtney Hoge of New York Life's Roanoke office.
However, as a general rule, replacing your existing cash-type policy with a new policy "is not to your advantage," according to Metropolitan Life Insurance Co.
There are five reasons:
The cost of issuing a new policy [including the high first-year commission] is charged against the premiums you pay. You may already have paid these costs. When you replace, you may pay twice.
Premiums for all policies are based on the insured's age and health. When you replace at an older age, you may pay more.
Claims made in the early years of a new policy may be contested by the company. When you replace, you may lose the valuable protection of a longer-existing policy.
The cash value of whole life and universal policies grows in value over time. If you surrender this type of policy, you may lose the cash value you have built. If you buy the same type of policy, you will have to start all over again.
The growth in a cash value life insurance policy is tax-deferred. If you replace such a policy, Metropolitan Life said, you may owe taxes.
Term life insurance generally is cheaper when a person is young because the premium is based on the policyholder's age. The cost rises over the years. Such policies build up no cash value.
Cash policies, on the other hand, have level premiums over the years and the policies build in value because they pay dividends. This type is also called permanent insurance.
Hoge said it's common to see someone who has had a policy eight or 10 years consider surrendering it because they've been approached by another agent selling term life insurance.
The new agent urges the policyholder to use the dividends in a whole life policy, or the cash value of a universal life policy, to buy term insurance.
Such a proposal should be explored before any action is taken, Hoge said. The policyholder, he said, should go back to the company that issued the old policy to ask for all the options. Sit down and talk with both agents about replacement because there could be "twists you don't know about."
Before replacing any policy, Hoge said, it's "critical" to have both agents provide all the information, pro and con, on the ramifications of changing policies.
Buying insurance, he said, "is no different from buying any other commodity." You have to shop and compare.
Sometimes there are reasons for changing from a cash to a term policy, Hoge said.
One might be a history of borrowing against the policy so that there are a lot of loans outstanding against the cash value.
Another might be a change in family situation, Hoge said. A divorce, for example, might mean that a spouse no longer needs protection, while term insurance for a few more years would suffice to ensure the education of the children.
But most times, he said, it's not to the person's advantage to make a change.
He suggested drawing a line down the middle of a page and comparing the existing and proposed policies. "But be careful to get all the facts," he said.
Ford said objective methods can help a family determine a reasonable amount of protection, now and in the future. "Owning that amount is the critical issue."
"Recognizing that everyone has a limited amount they can or are willing to spend," he said, "term insurance may be best initially." Or it may be better to combine term and permanent insurance in a compromise.
"In my experience," Ford said, "it is rare that anyone is prepared to solve all his or her protection needs with permanent coverage." If so, as the years go on, it may be desirable, and possible, to convert some of the term to permanent insurance.
Another alternative is to drop some of the term insurance, he said, because the premiums over time will become prohibitive.
Ford said whole life was created a century ago as a solution to the problem of escalating term premiums. "The idea was to overcharge the insured in the early years and use that excess to create a reserve." This pays interest which keeps the premiums level.
The policies have tax advantages, he pointed out, because the earnings on the reserves are tax-deferred while the death benefit is free of income tax.
Up to certain limits, Ford said, money can be withdrawn tax-free. Above those limits, people can borrow against the policy, also tax-free.
"Once the initial expenses have been absorbed in the first few years," Ford said, "the cash value growth usually becomes impressive. Surrendering a policy beyond that point - and starting off with new expense at an older age - usually does not benefit the insured."
Ford recommended periodic reviews, no less than every three years, to evaluate what coverage is best for a family.
If someone purchased far less insurance than required and it was all permanent, he said, "then maybe some or all of that permanent should be replaced with term. Usually that is not necessary."
LENGTH: Long : 111 lines ILLUSTRATION: GRAPHIC: Chart by staff: Questions you should ask about lifeby CNBinsurance policy replacement. color.