COVER YOUR BACK
Premium payment lapse could cost you dearly, writes Darana Chudasri
Terminating an insurance policy should be the last option for struggling policyholders.
It was really bad news for Atichote, a 37-year-old cameraman, when his employer had to lay off staff after the failure of the company’s latest project. “How would I pay all the bills — credit cards, life insurance premium, mortgage, children’s school tuition and living expenses? All of them are due soon,” he says, listing the expenses he had to meet with his final month of salary plus threemonth severance pay.
He has decided to pay all the bills and his two daughters’ tuition fees, at least until he finds another job. However, he is seriously considering whether he should continue with his insurance policy.
“Should I keep it or cancel it as the premium costs me almost a month of my old salary?” he says.
Bussara Ungphakorn, secretary of the Thai Life Assurance Association (TLAA), suggests that life insurance policyholders keep paying premiums if their financial crunch is only short term.
Terminating an insurance policy or failing to pay the premium on time should be the last option for policyholders who are uncertain whether they can afford to pay for insurance any more.
“If it [the financial squeeze] is temporary, we suggest they take out a policy loan to pay the premium. With this, policyholders are able to keep paying premiums and they have the flexibility to pay the insurance loan plus interest when their financial situation improves,” she says.
When life insurance policyholders make premium payments, the cash value that can be surrendered in exchange for cash gradually builds up and will eventually be sufficient to serve as collateral for the loan against the policy. However, policyholders who borrow against the policy must keep in mind that repayment for interest and principal is necessary to prevent the cash value from being deducted.
In cases where the loan is not paid off before the policyholder’s death, the insurance company will reduce the face amount of the insurance policy when the claim is paid. Since the interest adds to the borrowed amount, it puts the policy at risk of not giving the beneficiaries any money upon the insured person’s death.
Most insurance loans charge 2% per annum, but it is best to check with the insurance firm.
“If you let a life insurance policy lapse, you must begin again at day one when you buy new insurance protection and you must pay a higher premium. Moreover, the insurance company can deny protection for certain diseases,” says Ms Bussara.
If a policyholder does not pay the premium on the due date or even within the time period during which they can make good on a delayed premium payment, the insurer will no longer be obliged to provide coverage. Letting an insurance policy lapse could cost the policyholder more for the same coverage later as taking out a life insurance policy at a younger age means lower premiums.
In cases where an insured person does not have enough money to pay the entire premium, terminating some riders — such as health, accident and income compensation — is recommended as they provide annual coverage and letting them lapse will not have an impact on the life insurance coverage.
Natthapong Apinankul, an independent certified financial planner, suggests that the 31-day grace period after the premium payment due date can give a breather to policyholders suffering from cash flow problems.
Credit cards can also help extend the period to 45 days and up to 55 days for some cards. However, insured persons should avoid paying the minimum due amount as the interest charged on credit cards are relatively steep and this could add to their financial burden.
If the problem takes longer to solve, there are some alternatives to prevent the policy from lapsing, such as switching the billing cycle from yearly to quarterly or monthly, taking out loan insurance or changing the insurance terms to make premiums more affordable or letting the policy remain in force even in cases where the insured person no longer pays premiums.
Changing the payment period to a more frequent cycle will allow policyholders to pay smaller amounts in each billing period.
Adjusting the insurance terms by shortening the protection period but maintaining an assured sum, converting to a paid-up policy or changing to other types of life insurance policies are further possibilities.
Changing to a paid-up policy allows the policy to remain in place even though the policyholder stops paying premiums. But the insured sum will be reduced based on the surrender value, while the coverage period will remain unchanged.
However, life insurance companies also offer the option of reinstatement for policies that have lapsed no longer than five years. If this is the choice, policyholders are required to pay the overdue premium plus 2% annual interest to catch up with the delayed premium payments.
“If their liquidity runs dry and they no longer want life protection, they can cash out the insurance policy,” says Mr Natthapong.
According to the TLAA, cancellations and insurance lapses have risen over the past few years to 1.32 million policies worth 105 billion baht last year from 962,411 policies valued at 180 billion baht in 2009.
The number of cash surrenders of policies rose to 484,301 policies worth 105 billion baht in 2014 from 279,565 policies worth 53.4 billion baht in 2010.
Varawan Vechasut, deputy secretarygeneral of the Office of Insurance Commission, warns that policyholders will gain smaller amounts from cashing out life insurance policies taken out for less than five years than paid premiums and it may not be worthwhile to do so in some cases.
If you let the policy lapse, you must begin again at day one when you buy new insurance protection and pay a higher premium. BUSSARA UNGPHAKORN Secretary, Thai Life Assurance Association