Should I surrender my policies if I am having difficulties paying my premiums?
The premium for your policy is due. You are left with no choice but to surrender the policy to lessen your financial burden. But is surrendering your policy the only way out to solve this?
The short answer is definitely NOT.
What options should I look into before I surrender my policies?
Depending on the type of insurance policies in your portfolio, options are available especially the credit crunch is expected to be short-term. Here are what you should be looking into before you surrender your policies to reduce your financial commitment:
Do you know you have a one-month grace period to pay for your policy premium? Some insurance companies may even allow an additional one or two months for you to make your premiums before lapsing your policy. Hence, if you are facing short-term financial difficulties, it may be alright to pay your premium one or two months later.
Read about: Whole Life Policy: How does it work?
Using your cash-back
Some endowment plans come with the flexibility for withdrawal starting from the 25th month. You have the option to use your cash-back to pay for your premium. If the premium is still not paid after the grace period, the insurance company will automatically use your cash-back to pay for your premium if it is sufficient.
Applicable to: Endowment and Saving Policy
Read about: Endowment and Saving Policy: How does it work?
Automatic Premium Loan (APL)
If your policy is at least 3 years old, your policy would have accumulate cash value. If you missed your premiums and it is after the grace period, the insurance company will not lapse your policy, instead, they will start automatic premium loan automatically.
Automatic premium loan uses your cash value to pay for your premium, and the insurance company charges you interest on the loan amount. Let the policy go on APL until your financial difficulties ceased. Do make sure that you repay the loan amount plus interest if not the interest will accumulate over the years and you may lose your bonuses and even make a loss because of the compounding interest.
If you did not fulfil your premiums within the grace period, your ILP will not lapse like traditional policies. It will go into premium holiday instead. During a premium holiday, you do not need to pay your premium, your coverage still continues, and units are deducted to pay for your term portion in order for the coverage to continue.
Applicable to: Investment-Linked Policy
Read About: Investment-Linked Policy: How does it work?
Do I have to surrender my policy to gain access to the accumulated cash value?
Consider the options below instead of surrendering your policy, if cash is only needed for a short period of time:
As mentioned above, if your policy is at least 3 years old, your policy would have accumulate cash value. You can take a policy loan from your policy as a short-term loan. The interest rate is about 5 to 7% depending on individual insurers.
There is no policy loan in ILP. You are free to do a partial withdrawal from your units as a short-term loan with no interest. When financial difficulty ceases, you can do an ad-hoc top up back to your policy or you can just leave it as it is. However, do take note of the charges involves. Some ILP charges front end loading, whereby you have already paid for all the charges upon application of the policy, partial withdrawal, in this case, will be free of charge. But, if the ILP charges a back-end loading, there may be some charges involved while doing a partial withdrawal. It will be best to check with your insurance companies with regards to the charges before withdrawing.
Some ILP charges front end loading, whereby you have already paid for all the charges upon application of the policy, partial withdrawal, in this case, will be free of charge. But, if the ILP charges a back-end loading, there may be some charges involved while doing a partial withdrawal. It will be best to check with your insurance companies with regards to the charges before withdrawing.
Applicable to: Investment-Linked Policy
Taking a Balance Transfer
If you foresee that your financial difficulty is short term, do also consider applying for banks’ balance transfer. Promotions are usually available for 6-12 months balance transfer with 0% interest. This can help to solve your financial burden short term as compared to credit card loan or term loan.
So, do consider all these options available for your insurance policies if you have a short-term financial difficulty as surrendering your policies should be your last option as they usually involve high penalties.
None of the above helps?
If the current financial situation is really that bad, look at the next post on how you can get a higher cash value out of surrendering your policy.
Remember: The surrender of an insurance policy will lead to financial losses.
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