FAQ: Existing Life Insurance Policies

1.   I have paid the premiums under my life insurance policy for more than 10 years. The cash value is still less than the total premiums paid. Why does the policy give such a poor yield?

The insurance company has paid a high rate of commission to the agent in selling the policy to you. The commission and other marketing expenses take up about 24 months of your premium (for most cases). This money has been spent and is taken away from your savings.

The company has also incurred cost in providing the life insurance cover to you under the policy. This cost is relatively small. The company has also taken away some of your premiums as a profit margin for their shareholders.

After deducting the charges, the balance of the premium that is invested is quite small in the initial years.

For a company with high expenses, it usually takes more than ten years for the policy to reach its break-even point, i.e. the cash value is more than the premiums paid. If the expenses are low, the break-even point may be reached before ten years.

2. I have an existing life insurance policy. It provides a poor return on my premiums. Should I continue to keep this policy?

You should ask the insurance company to quote the following figures for you:

• cash value, if you surrender the policy now
• cash value, if you surrender the policy in 5 years time
• premium payable for the next 5 years

You can compute the yield for the next five years. If the yield is more than 3%, it is better to keep the policy, as you enjoy the life insurance cover and still get a modest yield. You can get a fairly satisfactory yield, as you have already incurred the high charges during the earlier years of the policy.

If it is less than 3%, you can consider terminating the policy. You can take up a term insurance policy and invest the difference in premium in a low cost investment fund.

3. My insurance agent has advised me to buy a new policy to provide additional coverage, as my earnings have increased in recent years. Should I take this advice?

You should buy a decreasing term insurance to provide the additional coverage that you need. This policy should cover you up to age 65, with the initial sum assured being reducing over the term. You should invest your additional savings in a low cost investment fund.

If your existing agent is not interested to provide this plan to you, as the agent does not earn a high commission, you should approach an insurance company directly.

4. Should I continue with my investment-linked policy? Does it give good value?

You have to study the charges under the investment-linked policy. Some of the charges are:

• the spread taken from each premium that is invested
• the expense ratio taken from the fund
• additional administrative fee charged on the policy
• mortality charges
• distribution cost

The distribution cost is usually hidden from the policyholder. It is the difference between the premium that you pay and the amount that is invested for you. This difference is used to pay commission to the agent and marketing expenses. It is usually taken from your policy during the initial years. After this initial period, here is no more distribution cost.

You have to compare these charges with the charges for similar plans in the market. Usually, if the distribution cost has already been fully deducted, it is better for you to keep the investment-linked policy.

5. I have retired from work. I find it a burden to continue paying the premium under my life insurance policy. Some policies require me to pay premiums for my entire life. What should I do?

You have the following options for these policies:

• continue to pay the premium using your past savings
• stop paying premium, and enjoy a lower coverage under the paid-up policy
• terminate the policy and receive its cash value

If you have sufficient savings, you can study the yield over the next five years, to decide if you should continue the policy. You can adopt the approach mentioned in paragraph 1 above.

If you do not have past savings, you have to consider the paid-up policy or to cancel the policy entirely for its cash value.