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When creating a holistic financial plan, you usually can’t escape the insurance portion. Life insurance is particularly complicated as it is often meant for the long term and requires a significant premium.
After a number of years, you may come to the realisation that the life insurance plan you picked is a larger commitment than you expected, or that it no longer meets your needs. If you find yourself in this position, what do you do next? Do you get a new plan and let the existing one continue to run, or cancel the one you have at a potentially high cost?
Depending on your objectives and what losses you’re willing to accept, there are a few exit options that are available to you.
Term life insurance is the ‘purest’ form of life insurance, and it doesn’t have any cash value or surrender benefit tied to it. To cancel your term life coverage, all you have to do is stop paying your premiums and let your policy lapse. The only thing you’ll lose is all the premiums you’ve paid in the past.
Do keep in mind that if you ever want to buy another term plan the premiums may be higher than what you’re currently paying, as life insurance premiums increase with age.
Terminating plans with cash value are more complicated because there are more moving parts to them. In addition to cash value, investment-linked policy (ILPs), and endowment plans also have an investment element to them and very long tenures. There are a few ways to go about exiting these plans.
If you’ve just bought the plan and realised that you’ve made a mistake, you have a 14-day free look period to cancel the plan without any penalties. All insurance companies are required to offer this period, and you can give your company written notice to terminate the plan.
Surrendering these policies within the first 2-3 years of purchase could mean losing all your premiums, and the amount could be significant. Let’s take a look at the example below, which is actually the surrender value of my endowment plan.
For the first two years of my policy, there is no surrender value whatsoever. If I decided to exit I would lose all the premiums I’ve paid to date, which is S$12,094.
If for some reason I wanted to exit from the 3rd year onwards, the surrender value becomes progressively higher. Unfortunately, I wouldn’t receive my principal amount until sometime between my 15th to 20th year holding the plan.
Permanent life insurance and ILPs function on a similar model. Thus, if you are not willing to lose out on some of the premiums you’ve already paid, it is incredibly difficult to exit this type of life insurance policy.
If you’ve decided to surrender your policy anyway and cut your losses, you can take the accumulated cash value and call it a day. By going down this route, you choose to sacrifice your future returns (see the non-guaranteed returns column), but you don’t have to worry about this policy ever again. It goes without saying that your cover also ceases the moment you surrender.
Lastly, instead of ‘fully surrendering’ your policy, you could convert your policy to a “paid-up” one. With this option, you can use the premiums you’ve already paid to be spread over the remaining term of your policy. This will allow you to continue coverage, albeit at a reduced rate for your sum assured.
In addition, you will not be eligible for future bonuses or returns that your plan may provide. The availability of this option varies depending on your insurance provider, so you might want to check before settling on this route.
No matter what your reasons are for wanting to cancel or change your life insurance policy, it’s important to ensure that it fits in your overall financial plan. Before you make a decision, you should always have a backup plan so that you are not left without coverage.