The key reason people buy life insurance is to ensure the well-being of the family after their death. But financial circumstances can change and keeping up with the premiums can be difficult as the belt is tightened.
Some people begin to think that the money does not provide an immediate return and could be better spent elsewhere.
But, if the family is financially dependent on someone, or they have debt, it is important to be financially protected through a life insurance policy. Much more important is paying the premiums on time so it does not lapse.
When there are serious doubts about something, reminding oneself why the investment was made in the first place is always beneficial.
It is a bad financial idea to cancel a life insurance policy. Why?
(1) No insurance protection
Once the policy is dropped so is the protection. The family will not receive any of the death benefits nor will medical coverage be given if the policy includes a medical rider.
All the premium payments made in the past count for nothing. And if the financial situation improves, the policy cannot be reinstated.
In other words, if the individual changes their mind later on, they cannot pick the policy back up where they left off.
(2) Debts do not disappear after death
After someone dies, their estate will have to clear all debt and only then is the remaining funds distributed to the beneficiaries.
Debt includes (in order of priority):
- Funeral expenses.
- Executor expenses – an executor is an individual appointed to administer the estate of a deceased person.
- Secured creditor – a creditor with a claim that is protected by specific assets, such as a bank or an outstanding house loan.
- Unsecured creditor – a creditor with a claim for which no specific assets are pledged, such as suppliers.
- The rest is distributed according to the Will.
So, the family is last on the list. With a valid life insurance policy, the death benefits can be used to pay off any debt, leaving the estate intact for the family.
(3) Premiums paid are not returned in full
Cancelling a term-life insurance policy means losing the premiums paid. But for whole-life or investment-linked policies, some cash surrender value may be returned.
There are two exceptions:
- Cancellation during the “free look period”: A policy has a cooling-off or free-look period, usually 10 to 30 days. If it is cancelled during this time, any premiums paid earlier will be returned.
- The policy includes a return of premium term or rider: On cancellation, 100% of the premiums paid will be returned, apart from the charge paid to add the rider. The repayment excludes administrative expenses. A rider cannot be included after signing the policy.
(4) Insurance will cost more later
Cancelling a policy and buying another one later at a lower premium with the same benefits is not going to happen.
Yes, a new one can be bought but at a much higher cost.
The younger a person is, the less expensive the insurance. And as the person grows older, health issues can crop up, which will push up premiums with additional loading, exclusions or, in a worst-case scenario, render the person uninsurable.
A change of occupation can also affect the premium. Moving from a desk job to sales, for example, would attract a higher premium as the risk is higher.
When a person is healthy, getting life insurance is easy but for those who are not, it can be difficult.
(5) Surrender charges can be high
By giving up whole-life and investment-linked coverage, one misses out on the cash value growth, apart from the surrendering charges, administration costs and tax. So, the person may get back very little.
The cash surrender value is computed based on the premiums paid, investment performance and surrender fees.
Surrender fees/charges can be high when cancelling in the first few years of the policy, especially for whole-life or endowment policies.
(6) Peace of mind
Death is a given. And while money will never replace a loved one, life insurance coverage will guarantee that the family’s short- and long-term needs are covered.
Life coverage guarantees that the family has enough to cover the immediate costs – medical bills, funeral expenses – and have something left for their future needs.
Investing in life insurance coverage is a smart financial move. Life insurance is one of the best ways to take care of the family’s future financial needs by minimising the risks.
If there are financial difficulties and it is a problem keeping up with the premiums, review the policy with the insurance provider or a qualified financial advisor before making any major decisions, such as cancellation.
There may be other options, such as getting cheaper term coverage, comparing providers for lower costs and adjusting the coverage to better meet both the needs and budget.
Credits – Mr Eric Kiang