This is a guest post by Mandy Hiew, the co-author of Money Tips for Doctors and founder of SAC Wealth Management Sdn. Bhd.
If you are a policy holder, every year you receive insurance statement from insurance company. I just got mine. Reading these statements can be very confusing for a lot of people.
If you bought a traditional plan, you will find a column named APL on the statement. APL is the short form of Automatic Premium Loan, if you stop paying premium (after your policy has acquired cash value), insurer normally will exercise the right to finance your premium (by using your surrender value as the collateral) so that your policy will keep effective.
As a policy holder, you may not be interested to know all the insurance technical terms, but I am sure you may be keen to know if your policy is on APL,
1). How long can the policy sustain?
2). If you do not repay the APL, how much would be your sum assured or cash value after certain number of years?
Without this knowledge, you will be having nightmares worrying your policies might lapse overnight which may leave you and your family unprotected.
We quote an example for your easy understanding.
First of all, you have to dig out your policy sales illustration (quotation), make sure it is a traditional (conventional) plan. For your information, APL is not applicable under Investment Link.
For example, after paying for 15 years, your policy is on APL. Assuming you discontinued payment for the subsequent years, how much would be your sum assured and cash value?
Age of entry: 30 Years old, Annual Premium: RM3,430
Policy Year (A)
No of years running APL
Total Premium Paid
(3430 x 15)
Cash Value without APL (B)
Sum Assured Without APL (C)
# Total APL (D)
Net Cash Value (B-D)
Net Sum Assured (C-D)
# Total APL can be calculated using financial calculator or excel
Note (1) Total APL at 20th Policy Year: PMT = (3430), N= 5, Rate= 7%, FV=21,105
You only pay for 15 years, at the 20th policy year (after 5 years of no premium payment), your cash value will be RM74,944, and your sum assured will be RM199,788.
At age 87, which is 42 years of no premium payment, based on this scenario, your policy will still be effective with the cash value of RM92,222 and sum assured will still be positive @ RM92,222.
The above scenario is true provided that insurance company delivers its cash value as projected at 7% in its quotation and the APL interest maintain at 7% per annum (as currently charged by Great Eastern Life Assurance)
Please take note that the purpose I write this article is merely to explain what will happen to your traditional policy if you stop paying premium after your policy acquired some cash value. I do not have intention to encourage you to stop paying your old policy. In fact your whole life policy is your best asset (investment vehicle) during old age. For example , should you continue paying your old policy at the 19th policy years, your annual saving (premium) is RM3,430, your cash value increases from RM88,269 to RM96,049 (an increase of RM7,780), where else in the world can get such a wonderful return at very minimum risk? And not forgetting your protection value is increasing too.
(BNM ruling stated APL interest ceiling cap is at 8% per annum)