A worksheet on what you give up when you replace an old policy

A new policy is often described by what it gives you: a lower premium, a bigger death benefit, a modern feature. A replacement has a second column that rarely gets drawn, which is everything the old policy was quietly doing for you. This worksheet draws that second column. You will fill in the same lines for the policy you own and the one being proposed, convert the differences to dollars where that is honest, flag the ones that cannot be converted, and end with a net figure and a short list of what the number leaves out.

Every figure below is invented for illustration. They are round numbers chosen to make the arithmetic visible, not prices, and your own policy will differ. The worksheet is a way to ask questions, not a verdict, and it does not replace a tax professional or a fee-only planner when the amounts are large.

Before you start: gather six documents

You cannot fill the worksheet from memory. Collect these first:

1. Your policy contract, including the schedule pages with guaranteed values and any surrender charge table.
2. An in-force illustration from the current insurer, showing today's cash value, loans and projected values. how to request and read an in-force illustration explains how to request one; the insurer has a duty under the replacement rules to provide information on request.
3. Your annual statement, for the premiums paid to date and any loan balance.
4. The new policy's illustration and sample contract, with guaranteed and non-guaranteed columns shown separately.
5. The signed application and replacement notice, once they exist.
6. Your own record of premiums paid, because your tax basis depends on it.

If any of these is missing, that is the first item on your list of questions.

The worked example: Jordan, 55

Meet a hypothetical policyholder, Jordan. At 40, Jordan bought a $200,000 whole life policy. The annual premium is $2,400, paid for 15 years, so Jordan has paid $36,000 in total. The current cash surrender value is $42,000, there is no loan, and the surrender charge schedule ended years ago. The guaranteed cash value ten years from now is $62,000 if Jordan keeps paying.

A salesperson proposes a $200,000 universal life policy at Jordan's current age of 55. Illustrated annual premium: $3,600. The pitch is that the new policy "does more," with flexible premiums and a death benefit that could be increased later.

We will test that pitch line by line.

Line 1: the new clocks

Any new policy starts its own incontestability clause and suicide clause periods. In most states the contestability period is two years, and the suicide exclusion is commonly two years (one in some states). During that window the insurer may investigate a claim and, for a material misstatement on the application, rescind the policy; see the two-year contestability period.

There is no clean dollar value for this, but you can size the exposure. Jordan's old policy has been past both periods for 13 years. The new policy puts $200,000 of coverage under review for two years. Write down:

• Exposure amount: $200,000
• Length of the new period: 2 years
• Anything on the old application you might answer differently now? (Weight, tobacco, a medication, a diagnosis since then.)

If you have had a health event since the old application, the new application must reflect it. Honest answers are the protection; the point of the line is to see that you are accepting a window of risk that you do not have today. The same-company credit that some replacement rules provide applies only up to the old face amount, and only if the new policy is with the same company or an affiliate.

Line 2: the premium at today's age

Policies price on age and health at the time of issue. Compare the premium for the same death benefit:

The arithmetic: $2,400 divided by 200 (units of $1,000) is $12.00, and $3,600 divided by 200 is $18.00. Over ten years, 10 × $2,400 = $24,000 and 10 × $3,600 = $36,000, so the new policy costs $12,000 more in premiums over that decade. Fill this in with your own quotes, and ask for the guaranteed premium (or the premium needed to keep the policy in force to age 100 at guaranteed charges), not only the illustrated one.

Line 3: surrender charges and early cash value

A new permanent policy tends to have low early cash value because the insurer is recovering commissions and setup costs. Universal-type policies show it as a surrender charge schedule; whole life shows it as a slow guaranteed cash value. See life insurance surrender charges explained.

Say the new policy's contract has a surrender charge of $2,800 in year one, falling by $280 a year, so that it is $280 at the start of year ten and zero in year eleven. Its guaranteed account value at the end of year ten is $15,000, and if Jordan surrendered at that point the charge would be $280.

The subtraction: $15,000 minus $280 is $14,720. In your own version, put the schedule's charge for each year you might leave, not just year ten, because a change of plans in year three is the more costly case.

Line 4: guarantees you cannot buy again

List every guarantee in the old policy that matters to you and ask whether the new one repeats it:

• A guaranteed cash value schedule and a guaranteed interest rate
• A fixed or capped loan rate
• A no-lapse or paid-up option
• Dividend history, if the policy is participating (dividends are never guaranteed, but a long record is information)
• A conversion or purchase right in a rider
• Waiver of premium or other riders that would now be underwritten again

Most of these cannot be priced by anyone but the insurer, so score each one yes, no or unknown and treat every unknown as a question for the agent. If the new policy's advantage depends on non-guaranteed columns, run the same check you would for any illustration; how to read a life insurance illustration shows how.

Line 5: loans and withdrawals

If the old policy has a loan, the loan is part of the replacement arithmetic in two ways. It reduces what you receive when you surrender, and it is still counted when the taxable gain is figured.

Take a variation of Jordan's case. Suppose the old policy had a $15,000 policy loan. The cash surrender value remains $42,000, but the check Jordan would receive is $42,000 minus the $15,000 loan, or $27,000. The taxable gain, however, is generally measured on the full $42,000 less basis: $42,000 − $36,000 = $6,000. The loan does not shrink the gain, and Jordan would owe tax on a gain larger than the loan-reduced check might make it feel. This is the same mechanism as the "phantom income" trap described in how cash value is taxed: withdrawals, loans and surrenders, where a lapse with an outstanding loan can create taxable income. If the old policy has a loan, a tax professional should look at it before anything is cancelled.

If the plan is to fund the new policy by borrowing from the old one, remember that this is itself a replacement under the model rules, and the loan keeps accruing interest while the old policy keeps charging.

Line 6: tax on the gain

For a surrender (not a section 1035 exchange), the gain is the amount received plus any loan cancelled, minus basis, and it is taxed as ordinary income. Jordan, with no loan:

• Cash surrender value: $42,000
• Basis (premiums paid): $36,000
• Gain: $42,000 − $36,000 = $6,000

To put a dollar figure on it, assume an illustrative 22 percent marginal rate: 0.22 × $6,000 = $1,320. That rate is a placeholder; yours depends on your whole tax picture, which is a question for a tax professional. Net proceeds after tax: $42,000 − $1,320 = $40,680.

A section 1035 exchange can move the value into a new policy without immediate tax on the gain, but it does not remove the other lines on this worksheet. See 1035 exchanges: swapping policies without tax.

Line 7: put it together

Compare two paths over ten years, counting dollars at face value. Path A keeps the old policy. Path B surrenders it, pays the tax, holds the proceeds, and buys the new policy.

How each total was reached: Path A is $62,000 − $24,000 = $38,000. Path B is $40,680 + $14,720 − $36,000 = $19,400. The gap is $38,000 − $19,400 = $18,600 in favor of keeping the old policy, in this invented case, before counting the new clocks and the lost guarantees.

Line 8: test the one assumption that can change the answer

Path B left the $40,680 sitting idle. In reality Jordan could invest it, and a fair worksheet gives that money a chance. Ask what return would close the gap.

Path B needs $38,000 at year 10. It already has $14,720 from the new policy and has paid out $36,000 in premiums, so the lump sum must grow to $38,000 + $36,000 − $14,720 = $59,280. Divided by $40,680, that is a growth factor of about 1.457 over ten years, which is roughly 3.8 percent a year after tax, every year, with no losses. (Check: 1.038 to the tenth power is close to 1.457.)

Treat that figure as a rough guide rather than a precise answer, because the worksheet counts the premium dollars at face value and the extra $1,200 a year in premiums would also have earned something if kept. Its use is to translate the choice into plain terms. Is it reasonable to expect your freed money to beat the guaranteed growth that the old policy's cash value provides, after tax, with the certainty the contract offers? Reasonable people answer that differently. Someone with a high-interest debt to pay off, or an old policy that is really lapsing, may find the numbers move the other way. Do the calculation on your own figures. A simple version of it is in the keep, surrender or sell your policy?.

A second case where the numbers favor switching

The worksheet is not rigged against replacement. Take a hypothetical term-for-term case. Sam, 41, holds a $500,000 term policy with 8 years left on its level period at $900 a year. Since buying it, Sam stopped using tobacco more than a year ago, and an illustrative quote from a new insurer for $500,000 of 20-year term comes in at $780 a year at Sam's current age and rate class.

• Premium difference: $900 − $780 = $120 a year, which over the 8 remaining years is 8 × $120 = $960.
• Cash value lost: none, because term has no cash value.
• Surrender charges: none.
• Guarantees given up: check for a conversion right on the old policy and whether the new one has one, and for how long.
• New clocks: two years of contestability, which Sam handles by answering the application accurately.
• Added benefit: coverage now runs 20 years rather than 8, and the premium stays level for all of it.

Most of the lines come out neutral or favorable, so this is a replacement that can be reasonable, provided the new policy is issued and paid before the old one ends. The same logic is in replacing a life insurance policy: when it makes sense. The tool that matters here is the order of operations: apply, get approved at the quoted class, pay, check the delivered contract, and only then stop paying the old premium. A coverage gap, even of a few weeks, is the one cost no spreadsheet can recover.

What the worksheet leaves out

No arithmetic covers these, so keep a separate list:

• Health. If you could not qualify for the new policy at the quoted rate, or at all, the comparison is moot. Never cancel first.
• Purpose. If the old policy has outlived its job (the children are grown, the mortgage is gone), the question may be whether to keep any coverage, not which policy.
• Insurer strength and service. Both companies' financial strength matters over decades; see AM Best, S&P, Moody's and Fitch ratings explained.
• Needs that changed. A death benefit that has to run to a particular age may call for a guarantee the new policy does not offer.
• The seller's pay. A new sale pays a commission and keeping the old policy pays the agent little or nothing, so it is fair to ask how the recommendation was reached. how life insurance agents are paid explains the structure.

A blank version to copy

Write these lines on a page, fill in both columns, and put a question mark beside any line you cannot fill:

1. Death benefit (old / new)
2. Annual premium and premium per $1,000
3. Total premiums over your planning horizon
4. Cash surrender value today (old), and any loan
5. Basis, gain and estimated tax if surrendered
6. New policy surrender charge in each year you might leave
7. Guaranteed cash value at the end of the horizon (old / new)
8. New two-year clocks: exposure amount and anything you would answer differently
9. Guarantees lost (list) and riders re-underwritten
10. Net position at the horizon for keeping versus replacing
11. Break-even return the freed cash would need

Then take the page to a second pair of eyes: a fee-only planner, a tax professional, or the state insurance department if a sale seems misleading. The replacement rules described in replacing a life insurance policy: when it makes sense give you the right to the old insurer's figures, so use them. If the page shows replacement clearly winning even after all this, you will go ahead with open eyes. If it shows a close call, that is usually a reason to keep what you have.

Key takeaways

• A replacement should be priced on two sides: what the new policy gives, and what the old one already provides that cannot be bought again.
• In the invented case, ten years of premiums rose from $24,000 to $36,000, the cash value fell from $62,000 to $14,720, and keeping came out $18,600 ahead before counting the new clocks.
• A loan on the old policy reduces the check you receive but not the taxable gain; ask a tax professional before surrendering anything with a loan.
• The one assumption that can change the answer is what the freed cash would earn; compute the break-even rate and judge whether it is realistic.
• Do not cancel the old policy until the new one is issued, paid for and in force, and keep the worksheet with the signed notice.