Texas Life Agent Practice Exam

What is a potential disadvantage of replacing an existing life insurance policy?

1. Loss of cash value in the existing policy

2. An increase in coverage benefits

3. Lower premiums than the existing policy

4. Access to more investment options

The correct answer is: Loss of cash value in the existing policy

Replacing an existing life insurance policy can lead to the loss of cash value in the policy being replaced. Many life insurance policies, particularly whole life or universal life policies, accumulate cash value over time. When a policy is surrendered or replaced, particularly before it has built up substantial value, the policyholder may forfeit these accumulated funds. This loss can be significant if the existing policy has been in force for several years, as cash value can be a crucial component of the policy’s overall value. Therefore, while there may be attractive features in a new policy, such as potentially lower premiums or increased investment options, the downside of losing the cash value from the existing policy can be a real disadvantage that needs careful consideration.