Useful Tips on Life Insurance Policy Replacement
Useful Tips on Life Insurance Policy Replacement
Life insurance, unlike general insurance, involves a longer policy period. Making changes on your existing life insurance policy may not be in your best interest. You will normally suffer losses if you surrender an existing life insurance policy, particularly during the early years of the policy period. To protect your interests, you should carefully compare your existing and the new insurance policies and assess whether the replacement of life policy (“policy replacement”) is in your best interests before making a decision.
What is Policy Replacement
Policy replacement means you are using, or intend to use some or all of the funds arising from your existing life insurance policy, or any savings made by reducing the premium payable under your existing life insurance policy to fund the purchase of your new life insurance policy. For example, such funds or savings may arise from：
a) surrendering / partially surrendering your existing life insurance policy to obtain its surrender value
b) taking out a policy loan (including automatic premium loan/collateral assignment) from your existing life insurance policy
c) withdrawing policy values from your existing life insurance policy (e.g. cash out dividends or redeem fund units etc.)
d) lapsation of your existing life insurance policy (e.g. by non-payment of premium)
e) exercising the right to a premium holiday under your existing life insurance policy
How to Protect Your Interest
When you apply for new insurance policy, if your answer is “Yes” or “Not yet decided” for whether you are using, or do you intend to use some or all of the funds arising from your existing life insurance policy, or any savings made by reducing the premium payable under your existing life insurance policy, to fund the purchase of the new life insurance policy, your licensed insurance intermediary must explain to you the financial implications, insurability implications and claims eligibility implications of such changes. Your licensed insurance intermediary must also explain and assist you to complete the “Important Facts Statement – Policy Replacement” (“IFS-PR”). For this purpose, your licensed insurance intermediary may require certain information on your existing life insurance policy. You may need to approach the insurer of your existing life insurance policy to obtain accurate and up to date information on your existing policy.
You must read all items carefully and check that the licensed insurance intermediary has explained all the information on the IFS-PR before you sign the IFS-PR. If you do not understand all contents of the IFS-PR or the advice or information provided to you by your licensed insurance intermediary is different from the information in the IFS-PR, please do not sign the IFS-PR and do not proceed with replacing your existing Life Policy.
Important Facts You Should Know for Policy Replacement
You should carefully compare your existing and the new life insurance policies, and assess below aspects to see whether the policy replacement is of your best interests before making a decision:
Financial Implications
- Informed Decision: Life insurance policies usually lasts for a long period of time. If you surrender/take out policy loan from/withdraw policy values from/suspend or stop paying premium/reduce the premium payable on your existing life insurance policy, particularly during the early years of the policy period, you will usually suffer loss, including by way of having to pay charges. You should carefully compare your existing life insurance policy against the new life insurance policy you intend to purchase, and assess whether replacing your existing life insurance policy is in your best interests before you make a final decision.
- Difference between cash value from Surrender/Lapse and total premium paid under your existing Life Policy: The cash value that you may receive from surrendering your existing life insurance policy or allowing your existing life insurance policy to lapse, may be less than your total premium paid. This means that you may suffer a loss. Further, you may incur surrender charges if you surrender your existing life insurance policy or allow it to lapse.
- Policy Loan Interest: The issuing insurer of your existing life insurance policy may charge you interest starting from the loan drawdown date. You should carefully review your regular statements to understand the opening and ending loan balance as well as the interest amount charged in the relevant period. Your existing life insurance policy may be terminated if the accumulated loan amount (and interest) exceeds a specified level of the account value/cash value of your existing life insurance policy.
- Withdrawal/Partial Surrender Charges: You may be subject to withdrawal charges or partial surrender charges within a prescribed period before the end of the policy term of your existing life insurance policy. For the new life insurance policy you intended to purchase, you may be subject to other early surrender/withdrawal charges within a prescribed period before the end of the term of the new life insurance policy.
- Policy Set-up Cost and Remuneration for licensed insurance intermediaries: If you purchase a new life insurance policy, a substantial part of the initial premium may be used to pay for policy administration costs incurred by insurers and remuneration for the licensed insurance intermediaries. As a result, you may incur additional cost for replacing your existing life insurance policy.
- Higher Premium: You may have to pay higher premium under the new life insurance policy in view of the difference in age, changes of health conditions, occupation, lifestyle/habit, and recreational activities (as compared with when you purchased your existing life insurance policy).
- Loss of Financial Benefit under the existing life insurance policy: You may lose the financial benefit accumulated over the years (e.g. loyalty bonus or dividends) or to which you may be entitled (e.g. terminal bonus or dividends) under the existing life insurance policy.
- Financial Benefits under the New Life Insurance Policy Not Guaranteed: The illustrated benefits of a new life insurance policy may NOT be guaranteed and whether they can be achieved depend on the performance of the issuing insurer of the new life insurance policy. If the new life insurance policy is an investment-linked assurance scheme policy, the illustrated benefits are based on assumed rates of return only.
Insurability Implications
Changes in Coverage: If you purchase a new life insurance policy and use it to replace an existing life insurance policy, some benefits, which are the policy features of the existing life insurance policy, may not be covered under the new life insurance policy due to changes in age, health conditions, occupation, lifestyle/habit or recreational activities. Also, riders/supplementary benefits under your existing life insurance policy may not be available under the new life insurance policy.
Claims Eligibility Implications
Benefits under the existing life insurance policy will no longer be payable to you if you surrender the policy or allow it to lapse. Besides, you may need to start a new waiting period in respect of certain benefits (e.g. medical, critical illness, suicide or incontestability) under the terms and conditions of the new life insurance policy.