A replacement is a new life insurance policy issued so an existing one can be dropped, reduced, or used to pay for the new one. An exchange is a specific move of cash value from one contract to another, often a 1035 exchange, which can avoid treating the move as a taxable surrender. They are not the same form, and both can cost you the contract you already have if you sign before you know what you are giving up.
Do not cancel the old policy on the day you apply for the new one.
What you give up when you replace a policy
The new policy starts a new contestability period, usually two years, in which a material misstatement can void the claim. The suicide period can start over. You lose the old issue age. If your health is worse than when you bought the first policy, the new premium can be higher, rated, or declined, and you may already have canceled the coverage that would have paid.
Term replacements also drop the conversion rider and any years left on a level premium. Permanent replacements can drop cash value, dividends, and a no-lapse guarantee. The new illustration’s non-guaranteed column is not a reason to surrender a contract that is already performing.
What a 1035 exchange does
A 1035 exchange moves cash value from one life policy to another, or from a life policy to an annuity, under Internal Revenue Code section 1035. Done correctly, the gain is not taxed at the time of the transfer. It is not a check mailed to you. If you surrender, take the cash, and then buy a new policy, that is not a 1035, and the gain can be taxable.
The exchange still replaces the old contract. Loans, surrender charges, and a new contestability period still apply. The tax rule does not make the new policy a better policy.
When replacement is reasonable
Replace when the old policy cannot do the job: the term is about to end and you still need coverage, the premium is no longer payable, or the carrier will not reinstate a lapse and your health still supports a new offer. Keep the old policy until the new one is delivered and the free look has started, so you can return the new policy if the pages do not match what you were sold.
Compare the new policy before you drop the old one
Price the replacement and read it next to the in-force contract. Same death benefit, your current age and health, and a clear list of what the old policy still guarantees.
Conclusion
We do not replace a policy to earn a new commission on a contract that already fits. The comparison is the old guarantee against a new offer from 30+ A-rated carriers, with the old policy kept in force until the new one is delivered. If the old contract wins, we leave it alone.
Our agents will also say when a 1035 exchange is the way to move cash value and when a surrender would create a tax bill you were not shown.
FAQ
Life Insurance
Compare a replacement before you cancel the policy you have.
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