Ravi Chandran
Buying insurance is a long-term commitment as your agent will remind you, and it can be painful to see your bank balance drop after each deduction for your insurance premium. What more if you are facing financial difficulties or have entered into retirement.
What do you do if you can no longer make payment for an insurance premium?
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It can be tempting to surrender your policy but it will mean losing the protection and loss of insurance premium amount paid since the policy came into place since the surrender value is typically a huge discount to what was paid, not even factoring the interest your money could have earned over time.
Well, there is an alternative – to sell your insurance to a third party.
What happens when you sell your insurance policy?
When you sell your insurance to a third party, the policy is not terminated but someone else will take over paying the insurance premium and have the choice to select who receives the payout. It also means loss of insurance coverage for you.
While some may feel queasy that a stranger may benefit on one’s death in the instance of a life policy, selling your insurance will fetch you a higher price than surrendering your policy.
What policies can be sold?
Typically, endowment and whole life policies by Singapore life insurance companies.
Is it safe to sell?
While the trading of policies is not regulated by the Monetary Authority of Singapore, sale of insurance policy is not new. It also exists in other markets such as the US, UK, etc.
In the event that the seller or investor has any grievance, they can take action against the company under the Consumer Protection (Fair Trading) Act.
What is the process for selling my insurance?
There are a number of third party vendors in the market. You will need to provide a copy of your insurance policy, with details such as plan name, start and maturity date, premium, insurance premium frequency, sum assured, surrender value, etc.
Typically, a quotation can be given within 3 working days.
If you are agreeable to the quote, the third party will arrange for the submission of documents to the insurance company and upon submission of documents and confirmation of policy transfer, a cheque will be issued to you.
Surrender insurance plan is costly, it is a decision that should not be taken lightly. Do consider it carefully. Talk to trusted financial planners to learn more about your options. Insurance companies may not give you the best price for surrendering your plan, hence you may want to get a higher price for getting cash from an irrevocable assignment of your policy, in other words, to sell your policy to investors who are willing to pay you more than what insurance companies are willing to pay you for surrendering the insurance.
All too often, investors who are short of money cash in their life assurance policies. This is not a wise thing to do. In most cases, it is better to borrow against the value of a policy than forfeit the policy and its risk cover and/or investment potential.
You incur losses when you cancel a policy by allowing it to lapse or when you cash it in (surrender it) before it reaches maturity. These losses can be significant, particularly if the policy covers you against dying or being disabled.
Universal policies, which give you both risk assurance and an investment portion, are the policies most seriously affected by the costs of lapsing or surrendering, but you could pay significant penalties if you cash in an ordinary investment policy too.
The consequences of using a life assurance policy as a quick source of cash include:
- You will probably receive a reduced investment value, because there are penalties for early withdrawals. These are known as early surrender penalties.
- The underlying costs of a new policy – when you are in a position to replace the old one – may be higher than those of the old policy.
- In the case of a smoothed/stable bonus policy, you may lose guarantees on the capital, as well as pay additional penalties if investment markets are in the doldrums, because the life company will take the underlying, lower values of your policy into account.
- Taking out a new risk assurance policy on your life may cost you far more. In fact, you may not be able to get a new policy when you are older and your state of health has changed for the worse.
- The premiums on risk assurance against death and/or disability may increase more rapidly with a new policy. If your existing policy is what is called a “robust” policy, it has a guaranteed level premium. However, such policies supply the level premium at a cost: your premiums are loaded in the early years (in other words, you pay more than you would otherwise), so you can enjoy what is effectively a discount in later years. If you cancel halfway through the policy term, you have already paid the higher premiums, but you lose the benefit of the insurance premium remaining unchanged (and therefore relatively low) in the long term.
Then there are risk policies that work the opposite way: they give you low premiums to start with, guaranteed for a limited period. They are often called “fragile” policies, because the premiums are likely to increase after the guarantee period – usually no more than a year. For example, if a life assurance company has more claims than expected in a single year, it will increase the premiums the following year, and fragile policies offer no protection against this.
At a time of distress or before the distress comes, you may also want to quickly review your existing home loan for refinancing to lower cost so as to ease you through a difficult time.
