I received a question from a reader who wants to know more about the feasibility of surrendering policies.
The surrendering and replacing of life policies has in the past cast financial planners in an extremely bad light.
Although this may be true in some cases, it is often in a client’s best interest to restructure his insurance portfolio in light of new developments in the market.
Life insurance products have changed over the years. Not only is cover often cheaper today as a result of better underwriting methods, but the trend in new-generation policies is to separate life cover from investments.
The impact of this is often poorly understood and can be demonstrated by way of the example of a client who pays a premium of R438 per month for R400 000 life cover, with a policy cash value of R88 000.
Should this person die now, his beneficiaries will receive R400 000. The cash value (investment account) will however not be paid out.
Even in 10 years’ time, when the cash value may realistically have increased to R200 000, it will still be the case. The client will receive life cover of R400 000 and forfeit the cash value.
This trend continues until the value of the investment account grows to equal the life cover, from which date the amount of the investment account will be paid out.
In this example, the terms must be reassessed.
For the same premium, an average healthy person could get pure life cover of around R600 000. The existing policy would be replaced and the cash value of R88 000 invested.
If this person should die within a year, the increased life cover of R600 000 will be paid out and he would still have the investment, which will have grown in the interim.
This gives a total of about R695 000 compared to R400 000 should the person in the example not switch policy.
While a policyholder may be better off in the very long term sticking with one policy to avoid paying costs and commissions, it must be remembered that the primary need is life cover. Each case must therefore be weighed against the improved benefits.
An added benefit of new-generation policies is their flexibility with regard to investment options. The investment products to suit individual needs are far wider than before.
Although the above might seem complex to the average reader, the message is that restructuring of insurance portfolios is not necessarily a bad thing.
Life circumstances change and it is therefore advisable to revisit your portfolio on an annual basis. Select a financial planner who can take a holistic view of your financial status.
Give this planner the leeway to do a complete estate and retirement planning exercise to ensure financial security at retirement and death.
Life insurance is a short-term need, but plan today as planning after death is troublesome.