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Consider terminating whole life insurance policies.

Saturday, September 6, 2014

An exchange with a reader inspired this short blog post.

My dad who is almost 70 recently told me that he was trying to reduce his expenses and he asked if he should still pay almost $500 every quarter for his one and only whole life insurance policy. It amounted to almost $2,000 a year as a recurring expense.

Unnecessary recurring expenses are like financial chains.

I explained to him that he has no dependents anymore and that it is OK for him to terminate the policy. He said that we would get more money from the insurance company if he should pass away while the policy was still in force.

My dad is right, of course, but I told him our family don't need the money. We are no longer dependent on him financially.

I think he might already have thought of terminating the policy but was unsure because he would have liked to leave more money for his family when he leaves this world. I persuaded him that the product had already done its job and that it had become a luxury, a "nice to have" item but not a "must have" item.

My dad terminated the policy shortly after and got back a 5 figure sum as well. However, the most important thing to note is that my dad's cash flow improved by quite a bit after this. His financial burden is now lighter.

Need or want?

For many years now, I am a big advocate of buying insurance for the sake of insurance. Buy when there is a need. It is like buying anything on a need to have basis in life.

We might want something but we should think if there is a need for it. This is premised on the fact that money is a scarce resource for many of us. Some of us realise this while some of us don't.

Beware of marketing efforts to create an impression that something is a need for us when it could really be a want. To be fair, however, something could be a need for a person but a want for another.

Related posts:
1. Matt terminated his whole life insurance policies.
2. Term life insurance: Why buy term?
3. Money management: Needs and wants.
4. Eldershield: Is it really necessary?
5. Enhanced Incomeshield for my mother.

20 comments:

Sillyinvestor said...

Hi AK,

I think people thinking of terminating whole life policies really need to think thrice and consider a few things.

1) it is a different ball game from buying term and invest DIY. You are already in the game, the distribution costs usually means you lose more than you contribute unless you are already holding it for donkey years, e.g. More than 15 years.

2) you are really sure you do not want the insurance to payout when u passes on. Understand that your money, unless it is cash in joint account, is not so easily transferable at a short notice.

The funeral, the medical fees before you see god in heaven, have to be borned by your love ones first. With insurance, your agent will help you with the processing of cash related matters.

Of course, you could make good plans and need no insurance service, but make sure you have a plan.

3) if your only grouse is continuous premium payment, you can turn your policy into a paid-up policy.

AK71 said...

Hi Mike,

Thanks for sharing these very pertinent points. :)

1. My dad had the policy for donkey years. I think he had it since I was in high school.

2. I think we will be able to bear the expenses you mentioned in case my dad says bye-bye to this world. I really don't think my dad's insurance agent cares enough to do anything anyway.

3. This is a good idea but it would make sense if we still need the coverage. Otherwise, the lump sum payment could be very helpful.

Whew! I think my dad's case to terminate his whole life insurance policy just made the grade. ;p

Of course, I know your intention is to flesh out my blog post to make it more complete. I can always depend on you for this. Thanks again. ;)

AK71 said...

Sharing this from FB:

JC:
Since the Dad of 70 has been paying for his policy for such a long time, it would be a waste to let the policy lapse. We never knows when a serious illness can strike anyone. Ever body hv to die one day, why give up the insurance, money is never enough! If Dad cann't afford to service the payment, I would take over to pay n in the end the payout would be more than the premium paid.

AK:
My dad had the policy for 24 years, maybe 25. He bought it quite late in life. It is really quite an expensive policy, therefore, for the amount of coverage he gets.

As for serious illness striking us, I think that is where Critical Illness coverage comes in. I always say we need Critical Illness coverage. My dad's whole life policy doesn't do anything in this area.

As for taking over paying of the premium, I think that my dad would not want any of us to do that. It would hurt his pride and I wouldn't want to do that, for sure.

Pay the yearly premium on his behalf from now on and when he goes, I take the money? Nah.

At the end of the day, my dad took back the money he paid over the last 24 or 25 years and more.

At least he gets to see his money when he is alive now. It is his money. I wouldn't want to take that away from him.

Stoical Keynes said...

Hi AK,

From the title of your post, I anticipate quite a few (esp insurance agents) to come forward and disagree with you. Oh well...

But not me. I have a similar philosophy as you with regards to whole life policies. ;p

Regards,
15 HWW

AK71 said...

Hi 15HWW,

As long as the comments are constructive and civil, I welcome them. :D

Having different perspectives from people who are thoughtful and who want to share without ulterior motives will only enrich our experience. Right? :)

Derek said...

HI AK,

I agree with your points and to share:

A few years ago, I cancelled my Dad's life plan that he was paying for over 20 years. He has taken a loan from his policy many years ago and he did not realize that the interest has snowballed. Thinking and 'convinced' that it would be a waste to terminate a policy after such a long time, I took it up to repay the loan.

It wasn't long before I realized that I was going to take a long time to repay the 'loan' and a good part of this sum is to pay back to the insurer the interest for borrowing my dad's own money!

The other important point is that the policy is a pure death only life plan. There was a personal accident rider but I cancelled that and bought a stand-alone accident rider. Personal Accident plans are not expensive and underwriting is not dependent on age.

Aided with the points that AK has already bought up, I cancelled the policy and channel the money into his retirement savings account which will suit his needs better.

AK71 said...

Hi Derek,

Very sound reasoning. :)

Your dad is lucky to have you help him manage his personal finances.

Thank you so much for sharing your experience with us here. :)

Kenneth Chua said...

Hi AK,
I am one supporter of traditional whole life policies with few policies. (Not working as insurance agent or had work as one). I believe that it is important to have insurance especially when there are dependents n in working life. However, upon reaching age 65 & above and dependants are grown up, its time to cash out.

AK71 said...

Hi Kenneth,

I believe that it is important to have life insurance too when we have dependents. However, whether we need whole life insurance or not is something else and since you think that once we reach 65 and once we no longer have dependents, it is time to cash out, it suggests that term life insurance could be the way to go (i.e. till age 65).

Of course, with term life insurance, there is no cashing out option but it would suit people who believe in not mixing up insurance with savings and investments.

Whole life insurance would be suitable for people who believe in forced savings and who are not hands on when it comes to investments. Even so, there are proponents of buying term life and putting the balance of their money in a passive instrument like an STI ETF (i.e. index fund) which is likely to give better returns than a whole life insurance policy would.

Kenneth Chua said...

Hi AK,
Agreed with your comments on whole life vs term insurance nowsaday. I was previously against term insurance as there was no payout at the end of the day on survival. I have outlived my first insurance agent, dumped another agent for pushing me to convert my polices to ILPs as whole life policies are "expensive".

No doubt, the returns from whole life are not high. However, it is a good form of "forced savings" compounded for policies in enforcement previously (i.e. more than 15, 20 years ago). Always brings a smile to me when I look at the policies.

I will not encourage anyone to take up whole life insurance policies currently but to explore other options.:)

For your Dad, it is a good choice to cash out at age 65 (Highest surrender value) but alright too at 70.

Cheers.

AK71 said...

Mr. C.T. Leong from NextInsight asked if I could reveal "the figures for the estimated payout upon death versus the actual payout upon cancellation by your Dad. With those figures, readers will know the "cost" or "penalty" your Dad has incurred thru early cancellation."

The surrender value was about $50,000. The death benefit was under $80,000.

Ray said...

Hi AK,

If your dad's policy HAS the 30+ critical illnesses coverage, would you still encourage him to terminate his policy? The life insurance portion is not useful now that he's 70, but Critical illness may be useful should you need the money to perform treatments etc.

Kindly share your thought on this :)

AK71 said...

Hi Ray,

Nope. His policy was a whole life policy without riders.

My thoughts on critical illness coverage? CI coverage gets more expensive as we grow older. Once we are retired from active employment, financially, it could be quite a burden.

Personally, I feel that we need more CI coverage in our more productive years, especially when we have dependants. The payouts from the CI policy would be useful to help cope with not only medical expenses but also daily living expenses as our ability to work could be compromised.

In our golden years, we should have built a nest egg and we can have less CI coverage, especially when we no longer have dependants.

Of course, we should maintain a good H&S policy throughout our lives. :)

Ray said...

HI AK,

Thanks for your prompt reply.

Yes I read that your dad policy had no C.I coverage.
My question was IF his policy had C.I coverage, would you have given the same advice to him to terminate?

Also, not sure if C.I premium really increases as we age since some whole life policy (with C.I coverage) has premium the same throughout.

AK71 said...

Hi Ray,

Oops. I tend to go off tangent these days. Growing old and infirm. -.-"

I would still have asked him to terminate the policy because he found the quarterly payments of $500 burdensome and he really doesn't have any dependants anymore.

CI coverage does get more expensive with age. It is just harder to see when bundled with a whole life policy as a rider.

For example, ask for a quotation for a CI rider that covers for 20 years and a CI rider that covers for 30 years for yourself and you should see a difference in price on a per annum basis. :)

Ray said...

But wouldn't you agree that should he turn be diagnosed with any of the 30 illnesses, Touchwood, the money would be very useful in the treatments ? thanks. Always enlightening to hear your perspective.

AK71 said...

Hi Ray,

I think that is where his H&S policy would come in. :)

I found this blog post which was actually an email from a reader which you might find interesting:
Getting covered for critical illnesses.

Ray said...

Hi AK,

Sorry to dig up your old post and comment on it again :(
I believe you also bought some whole life insurance when you were younger.
Did you also cancel them and buy term to make up the insured amount?
I'm contemplating that but worried about the extra loading / exclusion as I got older and have more problems.
So, hopefully you can share your thoughts about cancelling your whole life(if you had done so) and bought term.

Cheers.

AK71 said...

Hi Ray,

In my case, one of the policies was bought from an uncle and the other was bought from my dad's old buddy. So, there was a non-financial reason why I didn't cancel them. It was to keep the peace at home, if you know what I mean. -.-"

Although I suspect that my dad probably doesn't care as much if I were to cancel the policies today, because I have had them for twenty years or more and because they are not causing a strain on my finances, I have decided to keep them and view them as long term bonds.

A friend and current insurance adviser told me to consider them as a more conservative part of my portfolio. Very decent advice especially when he didn't sell me these policies. Bonds which are whole life policies in disguise? OK. I look at the money in my CPF account in the same way.

I might surrender these whole life policies in future if I should ever run into cash flow problems. For sure, I would surrender them when my parents are no longer with me because, by then, I wouldn't have any dependents. Actually, instead of another whole life policy which would be stupid, I bought a term life policy to increase coverage on my life just in case I go before my parents do in the next few years.

I definitely believe in BTIR and I keep telling people that if I had known the things I know today much earlier on in life, I would not have bought those whole life policies but I think I have made pretty good lemonade out of some lemons. OK, that is a bit overboard. ;p

Would I advise anyone to cancel their whole life policies and to replace them with term life policies? No, I wouldn't advise them to do so but I would suggest that they consider the possibility. They should discuss with their insurance advisers first especially if their health conditions have changed. :)

Ray said...

Thanks ak. Always appreciate you sharing your perspective.

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