I often got this question about life insurance from readers, prospects and clients — Should I lapse my existing policy in order to buy a new one?

My answer is always a big NO. You can buy a new life insurance policy, but surrendering your existing one is always not to your benefit.

Why you shouldn’t surrender your existing policy

Photo by kiddharma

1. Your existing policy was bought “previously”, which means you are younger at that time. The premium rate should be cheaper if you are going to get it now.

2. Cash value of an insurance policy starts to build up and accumulate significantly at least after 2 years time. Refer your insurance policy bonus payment, surrender value which can be found on the sales illustration or inside the policy. In other words, during the initial years, there is not much money left in your policy. If you lapse it and buy a new one, you are actually putting yourself back to previous condition. Don’t “reset” your insurance policy.

3. If you couldn’t afford to pay the premium, you can opt for premium holiday, or automatic premium loan. Pay it later when you are in a better shape financially. Just don’t surrender it.

4. If your existing policies don’t fulfill your protection needs, you should buy new policies that compliment the existing policy features, not replacing them.

5. Insurance agents get the biggest chunk of sales commission during the initial years. When you can’t afford to buy a new policy, don’t listen to your agent who try to persuade you to lapse the old policy in order for you to afford a new one. If you really need that much protection, I am sure that you will find ways to afford the premium. You can cut other expenses, but not your existing policy premium.

Replacement of Policy

As described by an insider who works in the Conservation Unit of the insurance industry:

In January 2005, Bank Negara Malaysia issued a directive which focuses on the Replacement of Life Insurance Policies. In simple terms, the replacement of policy refers to the act of replacing an existing policy with another policy.
The replacement being done through a various means that includes lapsing or non-payment of premiums, or, surrendering of the original policy, modifying the original policy so as to reduce its premium amount, allowing the original policy to go in Automatic Premium Loan, and a few more conditions as defined in the directive.

It was also stated clearly at Life Insurance Association of Malaysia (LIAM) website:

It would not be in the best interest of the policyholders to replace their existing policies. This is because they will probably have to pay a higher premium for the new policy since they are older. The cash value of their policies will take time to build up and the 2-year period of contestability will begin again.
LIAM has issued a set of Rules on Replacement of Policies to discourage such practices and to protect the interest of policyholders. Under these rules, an agent would not receive any compensation for the new policy that replaces another policy within less than 1 year before or after the original policy is discontinued.

More details click here (pdf).

Conclusion

The worst advice you might get from an insurance agent is “to lapse your existing policy“. You might have bought a policy that’s not according to your “want”, but I am sure it can be packaged someway to meet your real needs.