Life
Insurance: Don't trash that policy.
By Tim Morrison
Time Money (April 1998)
In the current economic crisis, many
asians are finding it harder to afford the life insurance they
need. If you're worried about paying yours, don't cancel your
policy yet: There are ways to cut your costs down. And if your policy
has accumulated cash you've been keeping against a rainy day, guess
what: it's raining. You can use those savings now to stay afloat in
the low spots.
There are 2 main categories of life
insurance: Term and cash-value. Term insurance pays a benefit to a
policy-holder's family if he passes away during the period covered, from
one to twenty years or more, and that's all it does. But it's the
cheapest kind of protection you can buy.
Most Asians prefer cash-value policies,
such as whole life or endowment life. Unlike term, such policies can
cover you for your entire life without renewal. They cost significantly
more than term because most of your monthly premium pays into long-term
savings or investment fund. For example, a healthy 30-year old male who
wants US$100,000 in coverage would pay $100 a month for whole life
insurance and up to 4 times as much for endowment life, compared to just
$15 to $25 for comparable term life.
Most insurance companies in the region
require clients to pay into such policies for at least three years
before they acquire "surrender value". At that time, the
savings portion of your policy becomes refundable to you if you cancel.
Alternately, you can borrow 70% to 90% of your surrender value and still
keep the policy active if you can pay the premiums. Because you're
borrowing your own money, such loans tend to have lower interest rates
than bank loans. But watch out: what you don't apy back can be taken out
of the benefit payment.
Perhaps, however, you don't want a chunk
of cash but need to reduce your premium costs. With most insurance
contracts there are several ways you can do so:
Get rid of excess
coverage. The less your
family is dependent on your income for survival, the smaller the
insurance policy you need. Generally, financial planners advice that you
carry five to 10 times your annual income in life insurance, more when
your responsibilities are greatest and your assets lowest.
Lose
unnecessary riders. Keep in mind that life insurance is there
to protect you from absolute disaster. Bells-and-whistles riders which
cover less-than-ruinous losses can be dropped from your policy. A
hospital-expenses rider which will pay for a posh private room for
example, can be reduced to cover a stay in a humble ward.
Pay your
premium out of your savings. Under most policies, you can
exercise what's called an "automatic premium loan" whereby
your insurance provider takes your premiums out of your policy's
accumulated cash value. How long you can keep this up depends on how
much is in your surrender value.
Reduce your
coverage. If you have ample surrender value, you can covert
to a reduced paid-up policy-reduced because the benefit is cut to match
what you've put in so far; and "paid up" because the surrender
value is used as a single lump-sum premium that pays for the policy for
the rest of your life. Just be sure you wind up with adequate coverage.
Convert to Term
Insurance. If the savings component of insurance is less
important to you, you can take your surrender value and put it towards a
term policy. The benefit will be equal to that of your old policy, with
the period of coverage decided by how much you put it.. The problem is
that it will cost you more to renew. Term insurance rates increase with
risk and age, and insurers can refuse to renew or set prohibitively high
premiums for older people or for those in poor health.
If you want to exercise any of these
options, get a request form change form from your agent or your
insurer's customer service center. It takes about two weeks for the
change to go through.
So what if you have to reduce your
premiums but your policy has no surrender value? "There are some
dilemmas there, says Charles Dunford, a director at Barber Asia, a Hong
Kong financial planning group. "If you are tow to three years into
your whole life policy when you bail out, you will have basically wasted
all those premiums. It's a difficult decision." If you can afford
to, stick it out until your surrender value comes through. If that's not
feasible, consider dropping the policy and buying term insurance.;
it's cheap protection for your family at a time you can ill afford to be
without it.
If you do decide to switch policies, or
even insurance companies, make absolutely sure that you are accepted
under the terms of the new policy before you cancel your old one; you
don't want to leave yourself exposed. "Fill out all their
applications," advises Dunford. "Jumps through all their hoops
before you switch.
A word about safety. Large multinational
firms are generally safer bets than local ones: their investments are
diversified, and because of higher capital requirements for foreign
companies, tend to be better padded. In Indonesia, for example, local
providers need as little as $200,600, in capital to start issuing
policies, where foreign firms need seven times that much.
How can you tell your insurer's doing?
Companies like Standard and Poor's, Moody's, and A.M. Best grade
the financial strength of major insurance companies; all three make
their ratings available online, at www.ambest.com
and www.standardpoors.com.
Companies with an "A" rating are considered stable;
those with an average in the low B's are considered
"vulnerable" and may be adversely affected by economic
conditions.
