The exchange option on a term life insurance policy lets you exchange your existing term life insurance policy for a longer term policy without any medical evidence. This option is generally available only after the first year of the policy, and before the end of the fifth year, though some companies extend this option out as long as 7 years, and some allow the option right from policy issue (year 0). Premiums for the new policy are based on your age when you do the exchange, but any health changes are not considered (since there’s no medical evidence required).

Uses of the Exchange Option

 The exchange option allows you to purchase a shorter term policy initially, at cheaper premiums and then in the future switch to a longer term policy. It’s useful when you’re faced with higher premiums for some reason initially. If the conditions that cause those higher premiums are temporary, then it makes financial sense to take a shorter term now (to help offset the increased cost) and then when the condition is resolved switch to the longer (and higher premium) term.

Life Insurance for Smokers

 If you’re a smoker looking at a 20 or 30 year term policy, but planning on quitting, then the exhange option can help you save substantially. Purchase a term 10 policy at smoker premiums (but at lower premiums than term 20 or 30). Then when you quit smoking for a full year, complete two steps (at the same time). First, apply for a request for reconsideration to take your existing policy to a nonsmoker. This leaves you with a term 10 nonsmoking policy. Then at the same time, apply for the exchange option to bump the policy to a non-smoking term 20 or term 30. The end result is a non-smoking term 20 or term 30 policy, but you’ve saved by paying for a term 10 smoking policy until you quit smoking (and those savings are substantial).    

Temporary Ratings

 If you have a temporary rating (i.e. weight, or some condition which is resolvable) then the exchange option can also save you money. Like the smoking example, simply purchase a term 10 policy with the rating. Once the rating is removed, use the exchange option to bump your policy to a term 20 or term 30. You’ve saved by having a term 10 policy instead of a term 20 or term 30, until the rating is removed.

Term Stacking

 Term Stacking is a process where you purchase a term 10 policy (at lower premiums than a term 20 or term 30 policy) until just prior to your next birthday. Then, you exchange the term 10 for your desired term 20 or term 30. The result? You save 40% or more on your life insurance premiums until your next birthday.
Note, this strategy is only available on Wawanesa Life policies, as they have a unique combination of policy benefits. First, they allow the exchange option right from the day the policy is issued (most companies require that you keep the policy at least a year before allowing the exchange option). Secondly Wawanesa uses your actual age to calculate premiums, whereas most companies use your ‘closest’ birthday to calculate your age for insurance purposes. So if you’re 40 years and 364 days old, Wawanesa still calculates your age at 40. Most companies would consider you insured age 41 after 40 years and six months.

Let me illustrate how it works with an example. Lets say you’ve just turned 40, your birthday was yesterday. You could purchase a term 20 policy at the rates for a 40 year old.
However using Term Stacking, you instead purchase a term 10 policy – at about 40% cheaper premiums than the term 20. You wait 11 months until just prior to your next birthday – the whole time you continue to save with the term 10 premiums. At that point, you use the exchange option and switch to a term 20. This works because Wawanesa lets you do the exchange option in the first year of the policy AND just prior to your 41^st birthday Wawanesa still considers you 40 years old for the new term 20 policy (most companies would consider you age 41 at that point). You now have a term 20 policy at the rates for a 40 year old, just as if you purchased it 11 months ago – but you’ve saved with term 10 premiums for that 11 months.

The life insurance quotes we offer here at lifecover.ca compare premiums AND we show you for each policy whether it has the exchange option, and if so, what years it is available for (i.e. 1-5 means you can use the exchange option after policy year 1, and before the end of policy year 5).