Have you decided to cancel your life insurance policy in order to switch to a more advantageous one? Be careful, because changing your life insurance policy before the end of the contract is not without consequences. Here are four key precautions to take when changing your life insurance policy.
Wait for your Quote Before Terminating the Current Policy
When it comes to insurance, there is no guarantee that a proposal will be accepted until you have the policy in your hands. Before you cancel your current life insurance policy, you should carefully review the new policy and check the terms of the new policy and the premium amounts.
Pay Attention to the Effective Date
Some insurance contracts take effect as soon as the form is signed and others only when certain conditions are met. Before signing the new policy and cancelling the old one, read the application carefully to make sure there are no conditions precedent for the policy to take effect immediately.
Calculate the Tax implications of Changing Policies
While the premiums paid on the policy and the death benefit are tax-exempt, the cash value of the insurance received by the insured upon termination of the policy is partially taxable. Depending on the increase in the value of the investments, the insured may have to pay provincial and federal taxes. Since terminating a life insurance policy can be expensive in terms of taxes, it's best to know in advance how much the tax bill will be: this will help you determine how much of the cash value you can dispose of, and also allow you to terminate the policy knowingly.
Consider Borrowing if you Need Cash
You may want to change your life insurance policy to get the cash value from the first policy because you need the funds. But there are other options that may be more beneficial. In order to obtain liquidity, you may be better off keeping your life insurance policy and applying for a loan by pledging the policy.
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