Replacing an Insurance Policy
Switching provider is good advice for power, broadband and insurance on your car. For life, health, trauma and income protection cover it can be one of the more expensive mistakes available to a household, and it is routinely presented as a saving.
The reason is a single mechanism: a new policy is newly underwritten, and underwriting looks at your health today, not on the day you first took cover.
The three things to remember
A new policy means new underwriting. Anything that has developed since becomes a new exclusion or loading. And stand-down periods restart from zero.
What continuity is worth
Take someone who took a policy at 30 and is now 40. In the intervening decade they have had a back injury, been treated for anxiety, or had a suspicious mole removed. None of it stopped them working. All of it is disclosable.
| On the existing policy | On a replacement policy |
|---|---|
| Underwritten on your health at 30 | Underwritten on your health at 40 |
| The back, anxiety and mole are covered | Each may be excluded or loaded |
| Stand-down periods long since served | Stand-down periods restart from issue |
| Ten years of disclosure history settled | A fresh disclosure obligation, freshly tested |
The old policy is not better because the insurer is nicer. It is better because it was written when you were healthier, and that is an asset you cannot buy back once you have cancelled it.
A replacement quote is often genuinely lower, and the arithmetic is not a trick. It is lower because it excludes the things the old policy covers, or because it is priced on a structure that starts low and rises faster. Comparing premiums without comparing exclusions, definitions and premium structure is comparing two numbers that do not describe the same product.
The rule that prevents most of the damage
One sentence, and it costs nothing to follow.
The gap scenario is the one to picture. A policy is cancelled, the new application is declined or comes back with an exclusion nobody expected, and the person is now uninsurable on the terms they had a fortnight earlier. That is not a rare edge case. It is the ordinary consequence of cancelling first.
Stepped and level premiums
Much of the apparent saving in a replacement quote comes from premium structure rather than from better value. A stepped premium rises each year with your age and is cheap at the start. A level premium is fixed for a period and is dearer at the start and cheaper later.
A stepped quote will always undercut a level policy in year one. Comparing them on the first year's premium tells you nothing about which costs more over the life of the cover, and it is the comparison most often put in front of people.
Any adviser can produce it, and it converts a misleading comparison into a real one. If the projection is not offered, ask for it in writing. A recommendation to replace that cannot survive a twenty year cost comparison is a recommendation that was relying on the first year's number.
Why you may be being advised to switch
This needs saying plainly and without insinuation. Advisers are commonly paid an upfront commission when a new policy is written, and little or nothing for leaving an existing policy in place. That is a structural incentive to recommend replacement, and it exists whether or not any individual adviser is influenced by it.
The regime recognises this. A financial adviser must give priority to the client's interests, and replacement advice is an area that attracts particular scrutiny because of the incentive. So the question is entirely fair to ask, and a good adviser will answer it without discomfort.
Two trauma policies both paying $200,000.00 are not the same product if one defines a heart attack more narrowly than the other. Two income protection policies are not the same if one pays on inability to do your own occupation and the other on inability to do any occupation. That difference decides claims, and it never appears in a premium comparison.
When replacing genuinely is right
This is not an argument for never changing anything. There are real cases, and they share a feature: the reason is something other than the premium.
| Good reason to replace | Why |
|---|---|
| The cover no longer fits your life | A mortgage repaid or children grown changes what you need |
| The old wording is genuinely inferior | Definitions and benefits do improve over time |
| The insurer has become unworkable | Claims handling and service are part of the product |
| You are in better health than at issue | A rated policy may be reunderwritten favourably |
That last row is the reverse of the main risk and is worth knowing. Someone who was loaded for weight, smoking or a condition that has since resolved may be able to improve their terms. In many cases that can be done with the existing insurer without cancelling anything, which is the safer route to the same outcome.
One thing to do this year regardless
Review the cover without replacing it. Check the sum insured still matches your mortgage, income and dependants, check the ownership and beneficiary arrangements are current, and check nothing has lapsed. Most households are wrong on at least one of those, and none of them requires a new policy to fix.
What this guide does not cover
Policy wordings, underwriting practice, premium structures and disclosure duties differ between insurers and change over time. General insurance on houses, contents and vehicles works quite differently and switching there is usually straightforward. This is general information rather than financial or legal advice, and any replacement decision on life, health, trauma or income protection cover should be taken with a licensed adviser who has read both wordings in full.
Related guides and tools
- Insurance exclusions guide, for what an exclusion actually does to a claim.
- How insurance premiums work guide, for why the new quote is cheaper.
- Life insurance explained guide, for the cover most often replaced.
- How insurance claims work guide, for where a replacement decision eventually shows up.
- Negotiating your bills guide, for the bills where switching genuinely is the answer.
Test Your Knowledge
Ten questions on replacement business, underwriting and continuity.
Sources: general principles of New Zealand insurance underwriting and the duty of disclosure; and the financial advice regime under which advisers must give priority to the client's interests, including on advice to replace an existing policy. Policy wordings, underwriting practice and disclosure duties differ between insurers and change. This is general information rather than financial or legal advice, and replacement decisions on life, health, trauma or income protection cover should be taken with a licensed adviser who reviews both wordings.
Related tools and guides
- Stepped vs level premium calculator: what switching does to lifetime cost.
- Excess optimiser: retune the excess instead of switching.