In is common for people to replace their insurance policies when an insurance agent presents better policies than what they have specially when the amount of the insurance coverage (face value) is higher and with lesser premium.
It is logical to do that. However, most of them who replaced their life insurance policies for higher coverage with lesser premium do not know the risk associated with replacing old insurance policies for new policies.
The risk is called, “Contestability Period.” It is a period within two years from the effective date of the policy, where the insurance company is allowed to review your coverage for anything you misrepresented during the application process. The “Contestability Period” exists to protect the life insurance company from fraud.
After two years from the effective date of the policy, your insurance policy becomes “A Non-Contestable Policy.”
Meaning, should there be any misrepresentation during the application process, the insurance company could no longer contest said misrepresentation. Therefore, it could not deny paying the amount of insurance coverage to the beneficiaries of the insured person who died two years after the effective date of the insurance policy.
However, when the insured person dies within the “Contestability Period” – that is within two years from the effective date of the policy and the insurance company found misrepresentation(s) during the application process, the insurance company could deny paying his/her beneficiaries of the amount of insurance coverage (face value).
In view of the foregoing, it is risky to replace your insurance policy because of the “Contestability Period”, for you will start all over again counting two years period from the effective date of your new insurance policy, to make your policy become “A non-contestable policy.
Accordingly, before changing your insurance policy, you have to carefully evaluate, the advantages you will get from a new insurance policy against the risk or likelihood that your love ones (beneficiaries) could not receive the amount (face value) of the your policy should you die within the “Contestability Period” if there was misrepresentation(s), intentionally or not intentionally during the application process.