Insurance Replacement Problems
You probably can't sit through a single commercial break on television without an insurance company promising you better rates or better service if you would only replace your existing policy with one of theirs. With such an emphasis on policy replacement, you may not realize that replacing your insurance may not be a good idea, and can negatively affect your insurability, credit rating and financial position.
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Life Insurance Issues
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Consumers are at such a risk of being manipulated when they replace existing life insurance policies that applications now specifically ask if the new policy you want is meant to replace an old one, and why. Life insurance costs tend to increase with every year you age, so the rate you pay for a new policy when you're older is probably higher than the rate on your old policy. Additionally, permanent life insurance policies accrue cash value, and this cash portion of the policy is reduced affected by commissions, policy fees and higher premium rates that often come with replacement policies.
Short-Rate Fees
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Other types of insurance have replacement problems as well. Personal lines insurance such as auto and homeowner's policies often have a short-rate penalty if you cancel them before the end of the policy period. This means that the insurer can keep part of your premium refund for itself. Typically, the penalty is 10 percent of the prorated refund, but different insurers have different means of calculating the exact amount you must pay. This may reduce the cost-effectiveness of switching insurers in the middle of a policy period.
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Credit Report Problems
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Insurers assume you will keep paying your premium unless you tell them specifically that you intend to cancel your policy. If you simply stop paying your premiums, the insurer will likely bill you for money you never intended to pay. If these notices go to collection, they can hurt your credit score. This can, in turn, affect your ability to secure new insurance or other credit.
Coverage Gaps
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There are many valid reasons why you may want or need to replace your existing policy with another one, but many people switch simply because they are promised a smaller premium rate. With insurance, lower premiums often means less coverage, so replacing your existing policy may leave you less protected than you were before without you knowing it. After you file a claim is the worst time to discover that you didn't have the level of coverage you thought you did, and it may cost you much more than the premiums you saved by replacing your policy.
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