Recently there is a popular post on Facebook claiming that an insurance company had cheated a policyholder for 12 years, but when properly explained, the whole incident is a misunderstanding.

You might have enrolled an insurance plan in the past and might have encountered the jargon “Critical Year” and “Fully Paid Up” options available in your plan. The jargon might not be comprehensible for a layman on the street.

Worst still, the agent advising you might not be explaining clear enough for you. Without clarifying any of the doubts presented, you just signed the dotted line, and there was where the premium payment kick started for years to come.

Here in this article, let’s demystify the jargon of “Critical Year” and “Fully Paid Up” into an understandable info for you to digest. Upon understanding this info, you will be well informed of these two terms.

Critical Year

The fundamental principle of life insurance is that premiums need to be paid throughout the entire policy term. When the Critical Year (CY) feature is selected, it means that insurance companies forecast the number of years for bonuses/dividends to be accumulated before the accumulated dividends/bonuses are adequate to pay for future premiums.

Please take note that this Critical Year is based on projection, it sometimes creates misconception among policyholders that when Critical Year feature is selected, further premiums are no longer need to be paid.

As you understand, company performance will always be up and down, and this is conforming to the law of economic cycle. When the declared bonuses and dividends are not meeting the expectation, there is where the accumulated value is lower, and indirectly the CY will be arriving slower.

This is where the problem starts. If the serving agent proposing this policy with CY features, informing the client that by paying the premium for X years (which is the Critical Year) and after that no premium needed to pay, this will be the risk the client will be bearing.

There are a lot of customers complain regards this issue, where after their premium payment of X years, they are shocked to find out that there is still need to continuing paying the premium. This happens mainly attributed to the little accumulated value where the CY is deferred and resulting in the need to continuing paying the premium to maintain the sustainability of the policy until whole life.

Now, you are clear with this CY….let’s move on to next “Paid-Up Policy”.

Paid-Up Policy

Paid-Up Policy is much straight forward, and it merely means that the premium of the particular policy has been fully paid off. Hence, no premium is needed to be paid anymore. At the same time, the coverage will still continue until the maturity date.

There are two scenarios where Paid-Up Policy is used:

1st scenario

For insurance saving plan, there are plans with saving duration ranged from 5, 10, 15 or 20 years.
For example when five years saving plan is enrolled, every year there will be premium payment being made. After paying (or saving) for 5 years, the policy will be fully paid up.

After that, the policyholder will no longer need to pay the premium anymore (and this is guaranteed). The accumulated bonuses and dividends will continue until the maturity date. Even there is no more premium paid for this policy, and the protection coverage will still continue until the maturity date.

2nd scenario

In any of the traditional whole life policy you are enrolling, for whatever reasons if you are not able to continue the premium payment in the future and the same time you would wish the continuation of protection coverage, you can choose to convert your policy into fully Paid-Up Policy.

With this conversion, there will be no further premium payment needed. There is a clause that you need to take note if you were to opt for the conversion…The sum assured of the policy will be reduced for the coverage to extend until the maturity date.

Imagine, if you no longer able to continue the premium payment and yet you are still in need of the coverage, terminating the policy will only mean of ending the protection coverage. But, by converting the plan into fully paid-up, you will no longer have the concern of forking out the premium payment. Although the sum assured reduced, at least the protection coverage can still be continued for your family.

With the concept demystify above, I hope you have fun understanding it.

This article is contributed by Henry Chu, Editorial Board, SAC Wealth Management Sdn Bhd, a financial service provider specialises in wealth management for personals and companies.

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