In this article
- 01The scenario
- 02Questions we might ask
- 03What is an insurance appraisal?
- 04Term or permanent coverage
- 05Why coverage needs change
- 06Four things to weigh before you replace a policy
- 07What is insurance arbitrage?
- 08How life insurance is taxed
- 09How life insurance fits your plan
- 10Key takeaway
- 11Frequently asked questions
Before you change a life insurance policy, look closely at the one you have. An insurance appraisal shows whether your coverage still fits, what it costs, and what you’d give up by replacing it.
The scenario
James and Linda want to look into their current life insurance policy to see if they can do better.
To help James and Linda, we would first need some details about the life insurance they already have.
Questions we might ask
- How long have you had your current life insurance?
- What type of coverage do you need?
- Do you currently have any significant medical conditions?
- Who are your beneficiaries, and are they still the right people?
- Is your premium locked in, or can it go up?
- If one of you passed away, what income would the other need to replace?
What is an insurance appraisal?
The only thing we know for certain is that change will come, so we do our best to prepare for it. One place we may start is an insurance appraisal.
An insurance appraisal examines existing policies to find any coverage that is unnecessary or too costly, or that can be upgraded for a similar or lower cost. We may look for ways to reduce or eliminate your premiums and still keep your death benefit. In an appraisal, we usually look at:
- The type of policy
- How much coverage you have compared with what your family would actually need
- What you pay, and whether that cost is locked in
- Any cash value, and how it has grown
- Riders, the add-ons that change what a policy does, and whether you’re paying for ones you don’t need
- Who you’ve named as beneficiaries
Term or permanent coverage
Term
- How long it lasts
- A set number of years
- Cash value
- No
Permanent (such as whole life or universal life)
- How long it lasts
- Meant to last your lifetime
- Cash value
- Can build cash value
General descriptions. Every policy has its own terms and costs.
Why coverage needs change
A policy bought when the kids were small and the mortgage was new was built for a different life. By retirement, the question often shifts from replacing a paycheck to protecting a surviving spouse’s income, covering taxes, or leaving something behind.
When a loved one passes away, a pension, Social Security, or another check can stop with them. Life insurance is one way to replace that income.
Four things to weigh before you replace a policy
A better policy on paper isn’t always better for you. Sometimes the right answer is to keep the policy you have and adjust it.
1. Your age and health today
A new policy is priced on your age and health now, not when you bought the old one.
2. A new contestability period
A new policy usually starts a new contestability period, often two years, when the insurer can challenge a claim over errors on the application.
3. Surrender charges
Your current policy may have surrender charges, and a new one may start its own.
4. Taxes on cash value
Cash value can often be moved to a new policy or an annuity without current tax through what’s called a 1035 exchange, but only if it’s done correctly.
What is insurance arbitrage?
Along with what the appraisal finds, James and Linda may want to consider insurance arbitrage. Insurance arbitrage is the idea of using several types of insurance to increase your net worth.
How life insurance is taxed
In general, the death benefit your beneficiaries receive isn’t counted as taxable income. Interest paid on that money, such as when the benefit is paid out over time, is taxable.
How life insurance fits your plan
In our 8 Elements, replacing income that stops when a loved one passes away is the work of the Revenue Replacer. Life insurance also touches what you leave behind, so we review it alongside your income, your investments, and your estate rather than as a stand-alone product. An objective financial advisor who is invested in your best interest, not in the products, is always worth having on your side.
Key takeaway
Review the policy you have before replacing it. An appraisal looks at the type of coverage, the cost, the cash value, the riders, and the beneficiaries, then weighs what a new policy would cost you in age, health, contestability, and surrender charges.
Sources
Sources reviewed October 29, 2026. Rules can change. This article is educational and is not personalized tax, legal, or financial advice.
Guarantees are based on the claims-paying ability of the issuing insurance company. Annuities may have surrender charges and fees, and withdrawals may be subject to taxes and penalties.
Frequently asked questions
- What is an insurance appraisal?
- A review of your existing policies to find coverage that is unnecessary or too costly, or that can be upgraded for a similar or lower cost, while keeping the death benefit your family needs.
- Should I replace an old life insurance policy?
- Not always. A new policy is priced on your age and health today and usually starts a new contestability period, and your current policy may have surrender charges. Sometimes the right answer is to keep the policy you have and adjust it.
- Is a life insurance death benefit taxable?
- In general, no. The death benefit your beneficiaries receive isn’t counted as taxable income, but interest paid on it, such as when it’s paid out over time, is taxable.
- What is a 1035 exchange?
- A way to move a policy’s cash value to a new life insurance policy or an annuity without current tax, as long as it’s done correctly.
Talk it through
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