Written By: Mark D. Forster and James M. Carson

For most consumers, life insurance is an essential component of long-term financial planning. Although life insurance is designed as a long-term contract, replacement of policies remains high. This study illustrates an analytical tool (marginal yield analysis) that provides insight on the life insurance replacement decision. For a sample of whole life contracts, results demonstrate that up to 93% of policies should not be replaced during policy years 4 through 10 (based on a hurdle rate of 5%). The methodology and findings are relevant to financial service professionals, consumers, insurers, regulators, and educators. Key Words: Life insurance, Policy replacement, Sunk costs, Retirement planning

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