Replacing an existing policy

Why this is regulated

Replacing a policy is a new sale for whoever recommends it, which creates an incentive to recommend replacement whether or not it helps the client. The industry has a name for doing it without justification, and regulators treat it as a conduct issue.

Several Canadian provinces require a replacement declaration to be completed when a policy is being replaced. The form exists so the consequences are set out in writing and acknowledged, rather than glossed over in a conversation.

If someone is recommending you replace a policy and no such form has appeared, ask why before deciding anything.

None of that means replacement is always wrong. It means the burden of proof sits with the recommendation.

What you give up

The contestability clock restarts. This is the most significant and the most overlooked. A policy held for fifteen years is generally incontestable, meaning an innocent error on the original application can no longer be used against a claim. A new policy starts a fresh two-year window during which the insurer can review the new application against your medical records. You have moved from settled coverage back into a contestable period on the strength of a brand new application. See the contestability period.

A new suicide clause. Also standard, also restarting at two years.

Your current age and health. The old policy was priced on who you were when you bought it. The new one is priced on who you are now. If anything has changed medically, the new offer may be worse, may carry a rating, or may not come at all.

Rights in the old contract. Conversion rights, guaranteed insurability options, renewal terms, and any favourable provisions written into an older policy all end with it. Older contracts sometimes contain terms no longer offered, and they are worth reading before giving them up.

Cash value, and possibly tax. Surrendering a permanent policy pays out the cash surrender value, and the gain above the adjusted cost basis is fully taxable as income in that year. That bill is frequently the thing nobody mentioned. See surrendering a permanent policy.

Early-year costs, again. A new policy starts its own acquisition cost cycle. On a permanent policy that means cash value building slowly from zero all over again.

When replacement is genuinely right

It does happen.

Term coverage is expiring and the alternative is a steep renewal price. Buying a new policy is usually cheaper than renewing, provided your health supports it. See renewing term coverage.

Your health has improved in a way the insurer will recognize, most commonly stopping nicotine use. Before replacing, ask whether your existing insurer will reclassify the current policy instead. Many will, and it costs nothing and avoids everything on this page. See smokers, vaping and nicotine testing.

The coverage no longer fits. A different amount, a different term, or a genuinely different product. Consider whether adding a second policy achieves this instead, which keeps the old coverage intact. See using more than one term policy.

The existing policy is genuinely poor, and this does exist. Some older universal life policies are underfunded and heading for failure, and some creditor coverage is worse than a personal policy for the same money.

The questions to ask

Before agreeing to anything:

What specifically is better about the new policy, expressed as a number?

What am I giving up, listed out?

Have you asked my current insurer whether they will adjust the existing policy instead?

What will the tax bill be if I surrender the old one?

How much do you earn on this, and how much would you earn if I kept what I have?

A recommendation that survives those five questions is probably sound. One that does not survive the last one tells you something.

The rule that prevents disaster

Never cancel existing coverage until the new policy is issued, delivered, and in force.

Underwriting can come back with a rating you did not expect, or a decline. Someone who cancelled first is left with nothing, at an older age, with whatever health finding caused the problem now on record.

Overlapping the two policies for a few weeks costs one extra premium. Against the risk of ending up with nothing, it is the best money you will spend in this process.