Is it wise to terminate my insurance policies if I'm in financial difficulties?

Posted by Life Insurance Association of Singapore on 16/11/2009 here.

As a general rule, terminating a life insurance policy should be your last resort.

Buying a life insurance policy is a mid- to long-term financial commitment.

Should you terminate the policy in its early years, the cash value payable may be less than the total premiums you would have paid. In the case of whole life or endowment policies, the cash value is typically zero in the first two to three years, or at best only a small fraction of the premiums paid. In short, most of the money you've paid would not be returned. For investment-linked policies, the amount of cash value, if any, is determined by the prevailing value of the units into which your premiums had been invested.

The critical point to appreciate is that should something unfortunate happen to you after you have surrendered the policy, your loved ones can no longer receive the insurance payout IN FULL; this is what is referred to as the "insurance cover or insurance protection".

To help you tide over your current financial situation without having to lose that valuable insurance coverage, the following are possible options (they may differ depending on the insurance company and the type of policy taken up) which you may consider:

(1) If you hold a traditional endowment policy, you may activate the Automatic Premium Loan (APL) should your policy have cash values. This means that the premiums are deducted from your policy's cash values and you do not have to make premium payment for a period of time. However, please note that the insurance company will charge interest on this loan. This option should be considered as a temporary measure only. If you hold an investment-linked policy, you may take a premium holiday by temporarily stopping the premium payment for a period of time.

(2) You may reduce the policy cover, for a lower premium.

(3) You may remove supplementary benefits, for a lower premium. Before surrendering your policy, please consider your current health/medical status. If you subsequently wish to buy a policy again, and if by then you have developed a medical condition, be cautioned that the insurance company may

(1) decline your application, or (2) apply a loading (surcharge) on the premium, or (3) exclude you from being covered for certain specified illness or disability that are present. The specified illness or disability may have been covered under the previous policy you had surrendered.

Another consideration is that the cost of insurance cover goes up with age.

Even as a healthy person, you will need to pay higher premiums on account of increased age.

A decision to terminate a policy should not be taken lightly. We suggest that you discuss with your financial adviser or your insurance company on the different policy options available to help you out with your current financial situation.