The Debt Panel: ‘Can I cancel an expensive life insurance policy?’
▶ A Sharjah reader can no longer afford $1,000 monthly payments that will continue to increase every year for the next decade
Iwas sold a life insurance policy by an agent a year ago. I did not do my due diligence before signing up for this plan and now feel it may not be the right fit for me.
am 38 years old and pay about $1,000 (Dh3,670) a month towards it. The premium increases every year and I have 10 years remaining on the policy. I feel this will be exorbitantly priced, especially towards the end of the policy term.
So far, I have paid about $13,000 towards the policy. In the interim, I lost my job. While I do have a new role, my salary is greatly reduced.
This means that I am unable to afford the premium payments and am going into debt by occasionally withdrawing money from my credit card to pay the instalments.
Should I immediately cancel this policy? Will I recover the amount I’ve invested so far as premiums? SG, Sharjah
Debt panellist 1 Steve Cronin, founder of DeadSimpleSaving.com
You and hundreds of thousands of other people have been persuaded to buy an insurance policy that benefits the agent and the insurance company far more than you.
This is because they receive commission: up front and throughout the product’s life.
There are two main types of life insurance policies.
Term life insurance is relatively cheap and simple. You pay a premium each month up to a specific age.
If you die before that age, your beneficiaries receive a lumpsum payment. If you die after that age, or stop paying the premiums, you get nothing.
Is this a waste of money? Absolutely not. You are paying for protection during a period when family finances would be badly affected by you dying.
Whole life insurance combines the insurance capabilities of term life with an investing component.
While a term life policy might cost $100 per month, whole life can easily cost $1,000 a month – as in your case. You are then covered for your “whole life” but mainly with money you invested – that extra $900 a month.
There are multiple problems with whole life insurance.
First, it is complex and the ongoing fees are very high – anything from 1.5 per cent to 4 per cent per year, with many hidden fees along the way.
So, if the stock market can expect 7 per cent growth per year, those annual 4 per cent fees will eat up 58 per cent of your annual profits. That makes a huge difference over time.
Second, the money tends to be invested poorly, in exotic actively managed funds with a 2 per cent to 3 per cent fund management fee – because some of that fee is paid out as commission to your adviser.
Investment in structured products is even worse – complex, risky and not easy to sell.
Third, these products are often very unforgiving if your circumstances change and you can no longer afford to pay.
Even if you stop paying, fees may continue to be charged as a percentage of what you would have put in had you continued to pay. So, what you have remaining in the policy starts to get eaten away.
Fourth, if you want to stop paying and get your money back, you will pay a high “surrender penalty”. Structures vary, but it’s likely that you will lose the entire first year’s premiums you paid.
Why? Because they have already been paid out or earmarked for commission or profit for the individual agent, their company and the insurer.
Insurance policies vary and, over time, have been getting less awful. However, most people have found they are better off stopping contributions and even closing the policy.
Using your credit card is a terrible idea, as you probably can’t afford to pay this off either.
When you stop the payments, it is likely that you should surrender the policy too. You are never going to get those premiums back – they have already been paid in commission and if you left the premiums invested in there, they would probably grow slowly due to high fees.
Ask the insurance provider for the surrender value. I expect it will be around $1,000 that you can get back.
They may try anything to keep you contributing but as you can’t afford it, you should stop.
They will also probably try to persuade you to keep the policy open. Many people have found it better to draw a line under this bad experience.
Then you can focus on paying off your card debt, get a cheap term life insurance policy if you need one, and learn how to invest sensibly and cheaply through a robo-adviser or doing it yourself via low-cost exchange-traded funds and an international brokerage.
Debt panellist 2 Keren Bobker, financial adviser and senior partner at Holborn Assets
I find it disappointing that people are still not given proper information when they take out life policies.
Literature from the insurance company should also be provided and investors need to take the time to read that.
The premiums sound rather high, so I can only assume that you have a whole of life policy.
They are frequently mis-sold as also being a saving plan, whereas any cash value that builds up in them is primarily designed to offset higher premiums at a later date. There will be no cash in value for some time, depending on how exactly the plan has been set up. It appears that this has only been in force for 13 months. The insurance company should provide you with details of your options.
You will not get back all the premiums as you have been paying, in the same way that you do not get a return of premiums if you don’t claim on a motor insurance policy.
It is likely that a cash value will accrue after a longer period, depending on exactly how the plan has been set up.
It is often better to keep life cover and investments separate, not least as many of the hybrid plans sold in this region are restrictive, expensive and very limited in respect of the investment element.
I do not have full details, so cannot give specific advice.
In most cases, a policyholder can be late paying up three months’ premiums before a plan is invalidated. You will need to check this with your insurance company.
While I do not endorse going into debt to pay into a policy, if the priority is to have life cover to protect a family and/or cover a debt, I don’t recommend that the plan be cancelled.
Depending on this situation, it may be sensible to arrange an alternative term assurance policy to protect dependents.
This is likely to be much cheaper. Investment can then be made separately into a vehicle that is more flexible and less expensive.
Assuming life assurance is required for family, the existing plan must remain in force until a replacement has been underwritten and is ready to start.
This goes to show why proper independent advice matters, tailored to an individual situation. Too often, people are simply sold a plan without continuing advice when required.
Debt panellist 3 Carol Glynn, founder of Conscious Finance Coaching
It’s important to understand the terms and conditions of your policy, including any cancellation provisions, surrender charges and potential refunds.
You should review your policy documents and contact your insurance agent or insurance company directly to get a clear understanding of the implications of cancelling your policy.
Cancelling a life insurance policy before the end of the term may result in a loss of premiums paid, especially if the policy has surrender charges or other fees associated with early cancellation.
The amount you may be able to recover will depend on the specific terms of your policy, such as whether it is a term life insurance policy or a permanent life insurance policy.
You may have an option to defer payments or take a break to help ease pressure, while you decide on your next steps.
Also consider the long-term financial implications of cancelling your policy.
If you have dependents who rely on the life insurance coverage for financial protection, cancelling the policy could leave them exposed to financial risks in the event of your death.
It would be wise to consult a qualified insurance professional. They can help you understand the options available and weigh the pros and cons.
Cancelling a life insurance policy should not be taken lightly. It’s important to carefully review your policy and understand the potential consequences before making any decisions.