Forster & Carson, 11 (1)

Forster, M.D. & Carson J.M. (2000). A financial decision framework for life insurance policy replacement. Financial Counseling and Planning, 11(1), 39-47.

A Financial Decision Framework For Life Insurance Policy Replacement

Mark D. Forster1 and James M. Carson2

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

1. Mark D. Forster, President, Finsure, L.L.C., 5016 Davenport St., Omaha, NE 68132. Phone: 402-556-9818. Fax: 402-556-5158. E-mail:

2. James M. Carson, Katie Research Professor, Illinois State University, 106 Williams Hall, Normal, IL 61790-5490. Phone: 309-438-7754. Fax: 309-438-7753. E-mail:

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