As a hot selling product of most life insurance company, investment-linked policy is most policy holdersâ€™ favourite insurance plan. You might or might not be informed that your investment-linked policy will likely to lapse in the future. The fact is that an investment-linked policy will probably lapse due to the following unforeseen circumstances:
- High insurance charges â€“ Insurance companies charge a natural premium on your investment-linked policy. When you are young, everything is cheap. When you are getting older, the insurance charges will increase accordingly. The amount is a shocking number when you reach age 70 and above
- Low investment value â€“ All your money in the policy are invested in investment-linked fund. When the market doesn’t go in favour to your investment strategy, your fund value will decrease. Once there is not enough fund unit to be deducted for insurance charges, your policy will lapse.
- Paying low premium for too much protection â€“ Some policy holders buy extremely high protection, but paying very low premium. For example: $200/month premium for $500,000 sum assured. High protection equals high insurance charges. Therefore, this kind of policy will like lapse too.
- Premium not guaranteed â€“ Insurance companies reserve the right to increase the insurance charges. This is especially prominent for medical insurance. Over the past decade, medical fees had increased substantially resulted in premium increase for hospitalization and surgical insurance benefits.
However, there are a few measures you can use to minimize a policy lapse:
- Read your investment-linked policy financial statement â€“ If you own an investment-linked policy, there is a periodic statement mailed to you regularly. Make sure you read it and find out the remaining total investment value in your account. Some statements even predict how long the policy can last without additional premium paid.
- Reduce your protection when you don’t need it â€“ What I mean here is at the time when you are quite old already and do not actively work to earn a living. Your commitment might be lower and there is not much financial burden. This means your protection needs also reduce (except for medical coverage). You can opt to lower the sum assured in your investment-linked policy. You can also take away some riders such as waiver premium benefit. This will significantly reduce the insurance charges incur.
- Top up investment value â€“ To maintain an adequate level of investment value in your account, you can do an investment top up. There are two kinds of top up, i.e. Single top up ( normally more than RM1000), or regular top up (normally more than RM100/month)
- Switch investment fund to lock the capital gain â€“ When your investment-linked funds are giving good returns, make sure you switch or do a portfolio rebalancing to lock the gain.
- Ringgit cost averaging strategyâ€“ pay monthly or quarterly premium to take advantage of the ringgit cost averaging strategy. As usual, insurance companies charge additional 5% of insurance charges for monthly mode of payment. But it is still worthy to do so when you take into account the time value of money.
Please remember to always review your policy and insurance need every year. I always keep my clients informed of their policy status and review yearly.
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