Be­fore you ditch one risk life pol­icy for an­other

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

agree to switch to a new prod­uct, ask the com­pany that pro­vides the prod­uct that is about to be can­celled what it thinks of the ad­vice you have re­ceived.

In the ac­com­pa­ny­ing ar­ti­cles, I have sep­a­rated the is­sues you need to take into ac­count when switch­ing a risk life as­sur­ance prod­uct and those you need to con­sider when switch­ing a life as­sur­ance in­vest­ment prod­uct. These are the is­sues you must con­sider be­fore you switch a risk life as­sur­ance prod­uct:

the cur­rent and fu­ture premi­ums in terms of your worst-case fi­nan­cial sce­nar­ios. You could be of­fered a very low pre­mium now, but the fu­ture pre­mium in­creases could be­come ex­ces­sive and un­af­ford­able.

Re­mem­ber that, as a re­sult of more com­pe­ti­tion, there has been con­sid­er­able down­ward pres­sure on risk life as­sur­ance premi­ums in re­cent years, so life com­pa­nies are in­creas­ingly re­ly­ing on com­plex and con­fus­ing add-ons to dif­fer­en­ti­ate their prod­ucts. These ex­tras may make a pol­icy ap­pear cheaper, but this may not nec­es­sar­ily be the case.

Many of the add-ons are of­ten no more than sales gim­micks, such as pay­ing you back, af­ter a cer­tain num­ber of years, any amount you pay in premi­ums over the as­sured ben­e­fit. In­fla­tion will en­sure that this amount will be vir­tu­ally mean­ing­less.

Al­ways con­sider what will hap­pen to your premi­ums once you are older and un­healthy. Be par­tic­u­larly care­ful of any pol­icy that grades your premi­ums ac­cord­ing to your cur­rent life­style. You may fall ill and be un­able to main­tain the re­quired life­style, re­sult­ing in sig­nif­i­cant pre­mium in­creases. And the older you get, the more at risk you are of suf­fer­ing from a de­bil­i­tat­ing dis­ease. Then you may have lit­tle choice but to pay the higher premi­ums, be­cause you have be­come unin­sur­able.

The pur­pose of risk life as­sur­ance is to en­able you and your de­pen­dants to main­tain your cur­rent stan­dard of liv­ing if you are dis­abled and un­able to work, or to en­able your fam­ily to main­tain their cur­rent life­style if you die pre­ma­turely. So ig­nore the temp­ta­tion of ben­e­fits above what you ac­tu­ally re­quire. Most, as I have said, are merely gim­micks.

One up­side of switch­ing risk as­sur­ance poli­cies is that the in­fa­mous early sur­ren­der penal­ties are not ap­plied if you can­cel a pol­icy, be­cause there is no cash value from which the penal­ties can be con­fis­cated.

the ben­e­fits you are re­ceiv­ing on your ex­ist­ing pol­icy against those of­fered by the new pol­icy, par­tic­u­larly when you are ad­vised to switch dis­abil­ity, func­tional im­pair­ment or dread dis­ease cover.

The devil is of­ten in the def­i­ni­tions of the med­i­cal con­di­tions that are cov­ered.

You need to check the def­i­ni­tions and have your ad­viser ex­plain in de­tail what is cov­ered and what is not cov­ered. Al­though the pre­mium may be lower on the new pol­icy, you may find that it comes at the cost of not be­ing cov­ered com­pre­hen­sively.

need to check how long it will take be­fore you are paid a ben­e­fit and whether you will be given a tem­po­rary ben­e­fit while you are wait­ing for the pay­ment of a full ben­e­fit. Dis­abil­ity as­sur­ance is a night­mare most of the time; it is the sin­gle-biggest cause of com­plaints to the Om­buds­man for Long-term In­surance. So tread care­fully.

can­cel a risk life as­sur­ance pol­icy, such as one that pays out on death or dis­abil­ity, be­fore a new pol­icy is in place. Your health may de­te­ri­o­rate in the in­terim, mak­ing you unin­sur­able or fac­ing ex­pen­sive pre­mium load­ings and/or ben­e­fit ex­clu­sions for par­tic­u­lar health con­di­tions.

com­mit­ting sui­cide in the first two years of tak­ing out a new risk pol­icy that pays out on your death. Most risk as­sur­ance poli­cies carry an ex­clu­sion for sui­cide in the first two years.

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