Have you bought an insurance policy to support a friend and then wonder what to do with it after they left the industry? Should you surrender or terminate it? Maybe you bought an investment-linked policy and you don’t know if you should continue paying those high premiums? With so many new insurance products, are your old policies still relevant?
Insurance policies are meant to protect you (and your loved ones) from adverse life events such as hospitalisation, accidents and death. Over time, your life circumstances may change, and you may need to make changes to your insurance policies. In such situations, here are 5 questions to ask yourself before you decide to surrender or terminate an existing insurance policy.
#1 Is Your Existing Policy Still Relevant To Your Life Circumstances?
Perhaps your policy was transferred from your parents to you or you bought the policy before you got married and had children. The first question to ask is if this policy is still relevant?
Existing life policies tend to have insufficient coverage to protect you and your loved ones when you have additional dependents. Marriage, divorce, births and deaths are all events that can quickly change your life circumstances and thus your insurance needs. Accordingly, you will need to re-evaluate your existing policies and see if they are still relevant or if they should be changed, surrendered or terminated.
Sometimes, a new job may also warrant a relook of your existing policies. If your company offers comprehensive group insurance, it may be worth evaluating if there is overlap in the policies. However, do check if the group insurance policy has portable benefits before you decide to surrender or terminate your own personal insurance.
#2 What Is The Cost Of Future Premiums?
For policies that have a cash value or investment-linked policies, the decision to surrender or terminate a policy can be even more loaded. In most cases, you would have already paid a significant amount of premiums and the policy is still far from the break-even point where the payout/ surrender value is equal or almost equal to the total premiums paid. Instead of holding on because of the sunk costs, you should consider the opportunity cost of the future premiums. Would the cost of future premiums be higher than if you paid the cost of early surrender and bought a term policy with the same coverage and invested the difference?
It may be worth considering surrendering or terminating a policy if the cost of future premiums is higher, there is still a long way to before the break-even point is reached or if your life requires more flexibility than being tied to a large annual premium. While it may hurt to give up on those sunk costs, it is better to cut the pain short. Alternatively, if the break-even point is in a few years, it may be worth paying those premiums until then.
#3 Has Your Health Conditions Changed?
With age, our health circumstances may also change. Be careful about surrendering or terminating policies, especially if you have chronic illnesses such as high blood pressure, high cholesterol or high blood sugar/ diabetes.
Pre-existing conditions can either add a significant amount to your premiums in form of premium loading or you may be excluded from purchasing certain new policies or making certain claims. Instead, it may be better for you to hold on to old policies bought before your diagnosis of pre-existing conditions and adjust the coverage as necessary.
#4 Can You Purchase Equivalent or Better Policies?
While most of the time, we can purchase new insurance policies with equivalent or better coverage, certain policies may no longer be available for various reasons. For example, along with the changes to Medishield Life, all new riders being offered from March 2018 for private integrated shield plans are required to have a minimum co-payment of 5%. If you have purchased a full rider for private integrated shield plan prior to March 2018, terminating your existing policy rider would mean that in the future, you can only purchase riders with a co-payment component. There is no way to purchase a new rider that covers the co-payment component.
Likewise, with LIA’s change in critical illness (CI) definitions, older policies may benefit from looser CI definitions. However, you will have to weigh the premium saving of new policies against the value of older policies which may have greater coverage or looser claims definition in your decision to continue or terminate your policy.
#5 Are There Alternatives Besides Surrender Or Termination Of Policy?
Finally, you should consider alternatives besides surrendering or terminating a policy. Most policies will allow you to adjust the sum assured or the policy coverage which may be sufficient to accommodate your changes in life or health circumstances.
If it is a temporary cashflow issue, you may wish to consider other options such as a premium holiday or deferral of payment. Alternatively, you may also wish to consider taking a policy loan or selling your policy, instead of surrendering or terminating your policy.