You have heard of unit trust switching, which is a way to lock your investment gain without paying double service fees. As mentioned in my previous article about the secret of unit trust investment, switching need to be done from time to time and integrated into your portfolio rebalancing strategy. But this post, we are going to discuss about insurance switching, nothing to do with investment actually.
What is insurance switching?
Insurance switching is an industry jargon that’s actually not known to most life insurance agents. If you follow through all my articles about life insurance, you will notice the difference between investment-linked policy (ILP) and traditional policy. For ILP, insurance company charges natural premium, or simply means that the insurance charges increase according to age. But for traditional policy owner, you pay a level premium which is calculated using the age of entry. Insurance switching here means dropping traditional plan to get an ILP or vice versa.
Do you really need to switch insurance?
There are two sides of view, you either switch from traditional plan to ILP, or from ILP to traditional plan.
Switch from Traditional plan to ILP
- some agents advice their potential clients to lapse their existing traditional and buy a new ILP. This is definitely wrong because Bank Negara had imposed a rule that the act of replacing a policy within one year will be penalized. The new policy agent won’t get any commission on the new sale.
- however, there are still some policyholders actually followed the agents’ advice to switch because of the appealing features of an ILP – low premium, high coverage, better health card etc. Why aren’t the agents penalized? This is due to the lack of linking between different insurance companies. There is no such centralized system where company A can track the status of the policy held at company B.
- you must realize that ILPs charges a high insurance cost especially at old age. You are getting the advantage of low insurance charges at young age. ILP is not so appealing to older folks who wants whole life protection on dread diseases. When you reach age 70, the mortality is simply ridiculous that your premium paid is impossible to cope with the ultra high insurance charges.
Switch from ILP to Traditional
- some policy owners thought that ILP is actually for investment. But that’s not true in that terms just because some agents might sell you the investment features of ILP. ILP is designed with integrated insurance features. In fact, ILP is a very effective tool to give comprehensive coverage at low affordable premium especially for younger people.
- when you get older, you might want to consider to actually switch from ILP to traditional plan. The proper way to do that is to reduce the protection on ILP, and buy new traditional plan. Ask your consultants whether the insurance companies provide a guaranteed switch that doesn’t require any health proof. When you reduce your ILP protection, it is not necessary to reduce your premium. Instead, you can take premium holiday and just stop paying premium as long as your investment value is substantial enough.
Photo by 12208732@N00
Image: Which route to take? Should you switch?
1. Buy both policies, traditional and ILP as soon as possible. This ensures that you lock in the best features of both types of policies at the lowest premium affordable at young entry age.
2. Buy ILP if you are young and can’t afford to have both type of policies. Normally for a budget of RM250/month, you can have a decent combination of both. Lower than that, just get the ILP.
3. Buy traditional policy if you are approaching retirement age, and seeking for life and critical illness coverage. Bad investment performance won’t affect your policy status much unlike ILP which depends very much on investment return and your age.