Insurance is something most of us would have. As part of a comprehensive financial planning, insurance plays an important role in protecting one’s family and beloved ones from any financial repercussions due to death or terminal illness, depending on the coverage.
Like deaths and taxes though, insurance premiums is something that we cannot avoid if we want to enjoy the benefits of an insurance policy.
However, should an unfortunate case of being retrenched or running into cashflow difficulties, cancelling your insurance policies that you’ve carefully considered and require the protection of should be the last resort.
Here are alternative options you can explore on to help you tide through the difficult period while you get back on your feet.
#1 Premium Holiday
A premium holiday is a provision that is provided for in some insurance or investment-linked policies (ILPs) that permit a temporary stop to premium payment for a short period of time (ranging between six months and a year) and is usually granted in an event of economic hardship.
This comes in useful not just for those who are in-between jobs, but also for those who have other pressing financial commitments to settle.
Typically, insurers will require some conditions to be met before allowing policyholders to utilise this provision, such as requiring the policy to have sufficient cash value before granting a premium holiday.
This would mean that the policy will have to be held in-force over a few years with prompt payment of the premium before the provision can be applied.
Depending on the policy, once the premium holiday is approved, policyholders may either see their premium payment period being deferred, or asked to pay a higher premium for a limited time upon the end of the premium holiday period, so as to offset the shortfall of the unpaid premium during the period.
In the case of Investment-Linked Plans, any existing units of investment may be withdrawn to pay for cost of insurance any other fees involved in the upkeep of the policy.
#2 Policy Loan
If a policyholder of a life insurance needs emergency access to cash, getting a policy loan, which leverages on the cash value of the insurance policy, is another option.
The premiums paid in the first few years upon the inception of a policy usually goes to funding the indemnity benefit. Once the indemnity benefit is fully paid, the cash value in the insurance will accumulate and continue to grow until the policy matures, where policyholders may take a loan from it.
Since the borrowing is done against an asset owned by the policyholder, the approval process is usually quick, and the funds can be used in any way the policyholder deems fit.
Depending on the terms and conditions of the policy loan, some insurers may impose a repayment schedule with interest of anywhere between 5% and 8% on the sum borrowed, while others may not require the policyholder to repay the loan.
However, if the policy loan is not repaid back fully upon the payment of the death benefit, the insurer will reduce the face value of the policy by the amount that was loaned plus applicable interest. This can put the policy at risk of not providing sufficient payout to the beneficiaries.
In worst case scenario, the policy might lapse and get terminated, should the added interest accumulate on the loan amount exceeds the cash value of the policy.
#3 Partial Withdrawal
Besides policy loan, policyholders can tap on to the cash value of their policy by making a partial withdrawal.
This is through the means of taking out part of the accumulated cash value or the death benefit related to the policy.
Unlike taking a loan where the available cash surrender value is held subject to the available cash surrender value, a partial withdrawal is considered a surrender of a part of the net cash value of the policy, and the action is irreversible.
It is important to note that a partial withdrawal will decrease the cash value of the policy upon death payout to the beneficiary, although the amount will not be lower than the Sum Asssured.
#4 Retrenchment Benefit (For Certain Newer Policies)
In addition to the above, some newer insurance policies come with attached retrenchment benefit, designed to help policyholders who are retrenched to cope with premium payment or other expenses.
For NTUC Income’s Family Protect term life insurance, the benefit provides the policyholder a payout of $1000 for every complete month of unemployment upon retrenchment, up to a maximum of three months.
On the other hand, Manulife’s LifeReady Plus life insurance policy provides policyholders a premium payment waiver of 6 months, should the policyholder or the spouse get retrenched and unemployed for 30 days or more.
Having A Robust, Sustainable Financial Portfolio
Just as with making any financial decisions, the choice to embark on a premium holiday, opting for policy loan or partial withdrawal to tide through a difficult period should not be taken lightly.
Especially in the case of policy loan or partial withdrawal, the amount of payout upon death will be reduced, and the financial objective that was originally intended with inception the policy can no longer be realised. This will result in the loss of the financial benefit accumulated over the years, and it will be difficult to obtain the same level of protection or terms in the future.
Also, policyholders may not be able to get the full amount from the loan or the withdrawal due to administrative fees may be imposed upon application. Therefore, anyone who wish to exercise such option should first consult their financial advisor before making any decision.
For those who are planning to buy an insurance, they should consider the affordability of the premium, as well as the scope of coverage before making a commitment, so as to avoid a situation where they are unable to afford the premiums in an event of financial difficulty.
In addition, it is also essential to have adequate savings being set aside for emergencies, which should cover at least 6 months’ worth of expenses, and to reduce expenses by cutting away any non-essential spending and, if possible, finding cheaper alternatives.