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.
10ha May 10, 2008 at 12:37 am
i’ve asked my agent, he said that to reduce premium, it’ll reset the policy again, and based on current age, which means the premium is higher in a way.
I want to ask how to determine whether a person is over insured, cause currently i’m paying rm300+ monthly premium, which is equivalent of my 10% salary.
KCLau May 10, 2008 at 2:02 pm
@10ha,
I don’t think it will reset your policy. I am sure that Great Eastern policies won’t be reset like you said for premium reduction. If it is a traditional policy. it will be partly surrendered. If it is an investment-linked policy, it works about the same too.
If you are paying 10% of your salary for insurance protection that’s over your need, it might be over insured. But I doubt that you will be over-insured. Normally if someone pay a lot more than 10% for full protection plan, it might be the case of over-insured.
yhchong September 4, 2008 at 11:38 pm
I heard we can 'switch' to another policy type within the same insurance company if we are not 100% happy about the existing one in terms of coverage, protection, etc. So instead of lapse the existing, we could do a 'switch' . Is this true?
KCLau September 4, 2008 at 11:47 pm
Normally, you can change the policy type within one year
http://www.kclau.com
Via iphone (爱疯)
mike July 27, 2009 at 10:39 am
If you feel not 100% happy about the existing one in terms of coverage, protection, etc.
Go for better insurance company, with better protection or plan with the same premium.
The important is the value of your money and the protection for your life.
Lyn April 7, 2010 at 5:55 am
My husband policy with Prudential was a protection of only RM120k, with a lot of unnecessary riders. He is paying RM345/mth since 2005. So i am asking the agent to reduce the premium from RM345 to RM100. And surprisingly she says OK and it is do-able. So any impact to my husband policy?
KCLau April 7, 2010 at 12:47 pm
You see, insurance agents got the commission on the first 6 years.
After you’ve paid the premium for 6 years, the 7th year onward all your premium paid will be fully allocated to your investment -linked fund.
So if you reduce the premium, you will have to go through the first 6 years “commission period” when you increase it later in life.
I would say if that extra premium you paid doesn’t affect your cash flow, just keep paying to make it a form of force-saving.
Lyn April 7, 2010 at 1:55 pm
What i am thinking of is to reduce the premium on this policy, and I can work with the additional premium to puchase a traditional plan. I hv addition RM245. (RM345- RM100). If by RM100 i can still enjoy the same protection, I can keep it this way , right? The impact wld be my investment value will be lesser since I am already paying a lower premium, right?
Quote from your previous reply:
“So if you reduce the premium, you will have to go through the first 6 years “commission period” when you increase it later in life.”
Will I be affected shd I not increase my premium nor sum assured in future?
KCLau April 7, 2010 at 1:57 pm
Hi Lyn,
I think you are planning it fine in this way.
You won’t be affected if you don’t plan to increase your insurance premium on the same investment-linked policy.
Lyn April 7, 2010 at 2:00 pm
Thank you very much for your prompt feedback
Sid April 26, 2010 at 12:58 am
hi, i’ve bought a couple of policies from a friend but recently when i was looking through statements i noticed that ive been paying for duplicated policies (e.g death and crisis benefits in both the policies and many, many riders)
Should i merge the policies or surrender the newer one and modify the older policy to add the necessary policies…..in the case of merging will the premium rate be higher?
KCLau April 26, 2010 at 10:56 am
Technically, insurance companies can’t “merge’ your policies. Death and 36 critical illnesses coverage is claimable on the total amount purchase, regardless of how many policies you have. So there is no trouble with that.
I suggest that you talk to a trusted insurance agent and have him/her analyze all your policies. I can introduce a trustworthy agent to you if necessary.
netmask8 April 26, 2010 at 12:57 pm
Greetings & G’Day,
1. Take insurance exams & join as an insurance agent.
2. Ask your senior insurance manager about ALL your doubts/ questions abt insurance.
3. Plan/ Buy own insurance plan for your family and yourself using your own insurance agent membership.
4. Before your insurance agent membership got terminated( usually 6 months with no sale figure), buy another insurance plan for your family or yourself.
5. Example :- Jan 2010 Buy Life Endownment Plan, May 2010 Buy Life Plan for Wife, Oct 2010 Buy Life Plan for Children, March 2011 Buy Personal Accidents(PA) plan, Aug 2011 Buy 36 critical illness plan for Yourself, Jan 2012 Buy Medical Card for Wife …etc ( Medical Card, Investment-Linked Plan, Saving Plan )..
You may SAVE commision for 2 years from the premium paid.. May apply this on unit trust too.. Take unit trust agent exam, learn from senior unit trust mgr and buy own unit trust.
Have a great day. Little savig sometime helps.
KCLau April 30, 2010 at 5:39 pm
Nice tips. As long as you don’t mind spending the time to study and past the exam, this can save you some money.
martin June 2, 2010 at 6:14 pm
beware of those spm level and “Pasar malam” agents which knew nothing in finance. they just ant to be get rich in selling insurance policy and they never care about your financial status.
I be cheated by a useless Great eastern agent and it is sucks that i have to paid he for his low quality service.
wan April 3, 2013 at 8:42 am
Hello..i nk tnya u.
1.my customer dah ada policy n not satisfy dgn previous conpany insurance.dia dah join 2 tahun.so dia join dgn i…adakah i dikira ROP?
2.dalam promote insurans…blh ke bg diskaun or rebate to customer?deduct own comision
KCLau April 5, 2013 at 1:34 pm
@Wan, regarding your question:
1. That is considered ROP too, although between different insurance companies, there is no linking of the system to auto-detect the ROP.
2. It is against agent’s code of conduct to provide discount.