Keeping up with insurance premiums

If you’ve only got a minute:

• Discontinuing your insurance coverage is a decision that requires careful consideration as it could jeopardise your financial well-being.
• Review your insurance policies regularly to ascertain their suitability and adequacy in your financial plan.
• Non-forfeiture options within insurance plans offer temporary relief while ensuring coverage remains intact, including automatic premium loans, reduced paid-up policies, and premium freezes.

In recent years, high inflation has tightened purse strings for many. If you're hit with a double whammy, experiencing an unexpected job loss, you might find yourself facing cash flow challenges.

While cutting expenses like shopping and entertainment can help, one item you should be cautious about removing is your insurance policies.

Insurance acts as a safety net, providing vital protection when life throws unexpected curveballs your way. To ensure this safety net remains intact, it's crucial to keep up with your insurance payments.

Terminating your insurance policies to "save" on premiums can come at a significant cost and requires careful consideration. Missing premium payments can result in policy lapses, leaving you and your loved ones vulnerable in the event of a health crisis or unexpected death.

Additionally, reapplying for insurance in the future could be declined or more expensive due to older entry age and potential health conditions.

Fortunately, there are non-forfeiture options within insurance plans to navigate these tough times.

Utilising these options can help you retain coverage and free up some cash flow temporarily.

Options to keep your policy in-force

1. Automatic premium loan (APL)

For life insurance policies with cash values (such as whole life and endowment policies), you can make use of the automatic premium loan option to help with your premium payments. An APL works by taking a loan against the policy’s cash value to pay for your premiums.

Assuming you have a whole life insurance policy with a cash value of S$20,000 and miss your premium payment date. After the grace period, the insurer automatically loans the premium amount (for example, a S$2,500 annual premium) from your policy's cash value, with the loan amount subjected to an interest as specified in the policy terms.

This means you get to retain your full coverage. Upon any claim, the insurer will still pay the claim benefits after deducting the loan and interest.

However, be mindful of interest charges, which could deplete the policy's cash value over time. When the policy loan (including APL) and accrued interest amount exceeds the cash value of the policy or policy value, the policy will automatically terminate, and all benefits and coverage will cease on, and from the termination date.

This option is suitable if you require temporary financial assistance and wish to keep a large part of the protection coverage intact, and do not have an immediate need to withdraw any cash value from the policy.

2. Reduced paid-up

This option uses the cash value of your original policy to purchase a paid-up policy with a lower sum assured. You will stop paying premiums.

While the policy's cash value will continue to grow, it will grow at a reduced rate. For policies that pay out a regular stream of income, this income stream will either cease, or its amount will be reduced.

Suppose you have a whole life insurance policy with a S$200,000 death benefit. Due to financial difficulties, you stop paying premiums. Instead of letting the policy lapse, you choose the Reduced Paid-up option.

In this scenario:

• Your policy remains in force, providing coverage with a reduced death benefit of S$100,000.
• Your beneficiaries will receive the reduced death benefit in the event of your passing.
• The reduced death benefit may be less than the total premiums you paid into the policy over time.
• However, it ensures that you maintain some level of coverage without the need for additional premium payments.

While a reduced paid-up policy provides immediate relief from premium payments, the reduced paid-up feature could potentially reduce the sum insured by a significant amount.

After a policy is converted to reduced paid-up, there is no option for you to reverse the policy into its original form in future. Any supplementary benefits will also be removed.

This option may be suitable if you have decided to cease future premium payments, and do not have an immediate need to withdraw any cash value from the policy.

3. Premium freeze

The premium freeze option typically involves a temporary suspension of premium payments for 1 year, starting from the next premium due date. Doing so will defer the policy maturity date or income payout by 1 year.

The protection benefit for policies that offer this option is usually based on a percentage of the premiums paid. The protection benefit will be reduced depending on the number of times the premium freeze option is activated.

During this period, you will not be entitled to any bonus declarations or yearly income payouts.

This option is suitable if you require temporary relief for one year of premium and comfortable with the delay of the policy maturity year or income payout year.

4. Premium shortfall charge

For investment-linked policies (ILPs), this feature kicks in automatically if the overdue premiums remain unpaid after the end of the grace period.

During this period, the policy remains in-force and you will continue to receive protection benefits as specified in the policy terms. When this feature is activated, there is usually a charge imposed.

The net value of the fund units under the policy must be sufficient to support the premium shortfall charges incurred to keep the policy in-force.

With fewer fund units, the total value of the ILP decreases over time and can result in a lower surrender value.

Once this feature is activated, any supplementary benefits attached to the policy may automatically terminate. You can request to reinstate the supplementary benefits within the reinstatement period upon premium payment but will be required to provide evidence of good health and subject to insurer’s approval.

You should carefully consider the implications of these fees when managing your policy.

This option may be suitable if you require temporary financial assistance. It will automatically deactivate once premium payment resumes.

5. Reduce sum insured

You can choose to tap on the cash value of the policy by reducing its sum insured. It is akin to a partial withdrawal from the policy.

Choosing this option means you are giving up a part of your policy. The policy's sum assured will be reduced proportionately by the sum assured portion given up.

You should be prepared to take the loss on a portion of the policy while keeping the remaining intact.

After a policy is partially withdrawn or have the sum assured reduced, you will not be able to reverse the policy into its original form in future.

This option is suitable for long-term financial challenges or if you need a cash payout from the policy.

In summary

Maintaining insurance coverage during tough times is crucial for safeguarding against unforeseen circumstances.

When considering non-forfeiture options, review your policy contract for full terms and implications.

By carefully managing your insurance premiums, you can protect your financial future and provide peace of mind for yourself and your loved ones.

If in doubt, consulting with a trusted wealth planning manager can offer valuable guidance tailored to your specific circumstances and help you navigate your financial situation effectively.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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