Saturday, October 31, 2009

Cost of surrendering an insurance policy(2)

I'm not against surrendering a policy if necessary but we must understand why we do it and one least likely reason should be terminating current plan to buy another plan.

I like to share the steps to take before you finally decide to terminate any policy.
1) Compile all your insurance policies and go through a risk management analysis
* We must first know what we have and know what we need before we can evaluate if that policy should exist in our portfolio.
* We should understand if this plan is able to give us the necessary protection or the necessary savings component.

2) Understand the benefits of your current plan

a) The potential returns?
* Ask for the latest Benefit Illustration from the Insurance company. If you are not looking for the protection component, are you looking for the wealth accumulation part?
* If the policy have been around for many years, the cost of the policy would have already been incurred many years ago and the yield looking forward can sometimes be very attractive.
* There are some policies that gives attractive anniversary bonus which can be worth waiting for if its only 2-3 years down the road.

b) The terms and conditions?
* Some older policies have terms and definitions which are beneficial to the policyholder.
* It can be such that the TPD or CI definition be less stringent on the insured compared to current definition.
.* If one is to surrender the plan for a new one, he/she will have to adhere to new definitions
c) The cost of protection?
* As the policy could have been purchased many years ago, the cost of protection could have increased compared to if you get the same coverage today.

3) Are ILPs really that bad?
I do not recommend regular premium ILP if the person do not have it now but if the person already have it and already have it for a couple of years, I'll not tell him/her to surrender it? Why?
a) The high cost of an ILP is already paid in the initial years
Since the future cost is considerably low, then we should reap on the benefits of what an ILP can give us and not to just terminate it.
* Some ILPs gives as much as 108% allocation after X years, this will help you accumulate funds faster
* Most ILPs offers yearly renewable term insurance which gives very high coverage at very low cost. If the insured is still young and have a high dependency needs, why not just let it continue to enjoy the low premium?
b) How about the high mortality cost in later years?
* It will be tricky if the insured purchased the ILP in his/her lat 40s or 50s because they would not have accumulate much fund in the policy and yet have a high mortality cost to pay.
* For such circumstance, they have to evaluate if their current needs warrant a high insurance coverage. If yes, then they may have to review their policy more regularly to reduce the Sum Assured when their investment value increases.
* There are some ILPs that take into account the accumulated investment value to reduce the insurers "Sum at Risk". When the Sum at Risk reduces, the cost of insurance will reduce as well.

Is there a need for a Limited Premium Whole Life policy?
* I dislike the idea that the policyholder is told to buy another whole life policy simply because the current Whole Life plan is not a limited premium one.
* The concept of a Limited premium whole life plan is to ask the insured to pay XX% higher premium compared to a regular premium plan so that the XX% extra premium collected can be used to fund for future premium payment.
* This concept can actually works for many regular premium whole life plan because they can be converted into a "paid-up" value policy where the insurer use the current cash value to calculate the sum assured that the insured can enjoy even if he/she stops the premium today.
* It is unfortunate that it is difficult to calculate the "paid-up" Sum Assured if the insured is to continue the premium payment many years down the road and many people will eventually prefer to buy another whole life policy as they would have the numbers to see.

Is your needs the highest when you are old?
* Many advisors like to say “When you are old, this is the time you need insurance most because you have the highest chance of contracting it”.
* Highest chance = Highest need? In my opinion is flawed. It actually the reversed, the needs are lower when we are old because its very likely that

a) Our dependents are independent
b) Our liabilities have reduced
c) Our assets have increased

d) The person might have already retired and not necessary to protection the loss of income
e) Risk appetite for investment reduced with lower risk of major investment fluctuations, etc

* We should be concern with accumulating that asset to self-insured into our older age instead of getting more whole life policies to achieve it.
* We should be concern if we have a good medical and "Long term disability care"coverage into our retirement years.

Restructuring of insurance portfolio can be necessary at times but do not fall into the situation whereby you terminate your ILP or Whole Life plan unnecessarily or worst, buy another whole life plan simply because it is limited in premium.


Anonymous said...

I have another suggestion when evaluating whether to terminate an ILP or not. If the agent had misrepresented the policy and did not disclose how it actually works, the client may consider taking legal action against the agent in order to get back all the premiums. If already uninsureable, the client should force the agent to undertake to become the insurer.

Lucian said...

Thanks for yet another insightful post.

I really appreciate you sharing your advice on these tricky matters.

If I do not already have a FA I would have strongly considered engaging you for help.

Anonymous said...

Limited payment means limited coverage and limited cash value.
You pay less(shorter) and you get less.

Anonymous said...

Adrain, if you have read Lorna Tan's article about advisers and fees in the Sunday Times
you will notice Lorna also mentioned that MAS has advised the insurers that commission is not a suitable way of compensation.
She also noted the banks especailly Dbs have taken measures to improve the advisory process . I hope also the insurance companies will also be warned about the sales process.
DBs will return the money if the fact find and analysis shows that the recommendation is not suitable for the customers.
Agents no longer can state as reason that the customers want the products and therefore it is the right recommendation. It is not accepted anymore.
Good for you ,Adrain, that you are beginning tosee light at the end of the tunnel for being honest and competent.Keep up the good practice and do not be swayed by your former colleagues from NTUC who want to see you fail as a financial planner. They are product pushing salesmen.

A well Wisher