Surrender of policies - look at alternatives

06 December 2004 LOA

To simply surrender policies without looking at alternatives is not only totally irresponsible but often not in the best interest of the policyholder, according to a statement by the LOA.

Gerry Anderson, deputy executive officer: market conduct and consumer education of the Financial Services Board (FSB) said he did not believe that it was in the interest of the investor for anyone to suggest that their insurance policies should be cancelled, made paid up or surrendered. "The FSB supports fair criticism where necessary and believes that many existing
long-term insurance products are still suitable for the purpose for which they were purchased."

The LOA was responding to media coverage this week where policyholders were encouraged to surrender their long-term insurance policies and the reasons why. The article was based on an individual's decision to surrender his portfolio of traditional universal life policies and his experiences in this regard.

The long-term insurance industry strongly recommends that policyholders consider all aspects relating to their portfolios before making a decision to surrender their universal life or any other long-term insurance policy.

The nature of universal life policies
Universal life and reversionary bonus policies were designed and sold in an environment where flexibility of investment vehicles did not receive a lot of attention.  These policy contracts have been optimized to provide a combination of death and disability cover with an attractive maturity value, but the early termination values do not provide good value for money.  Life insurance companies have not tried to keep this a secret.  In fact, members of the LOA clearly disclose and highlight the costs involved when a policy
is surrendered to be replaced by a new investment vehicle.

Conversion is a better option
Most life offices have recognised that times have changed, and that clients need access to cost effective solutions to convert their traditional policies to new generation products with separate investment and risk cover policies. If your financial needs and requirements have changed, it is usually the best option to convert your accumulated fund value into a new generation savings policy, which will provide you with access to a range of
tailor made investment funds, with full flexibility to switch between these funds to adapt to your changing circumstances.

It is definitely NOT the best option to surrender your policies. You do not have to incur surrender penalties, and you also do not need to incur any new upfront costs. 

Consider your needs carefully
However you should only contemplate such a conversion if your financial needs have changed to such an extent that your existing policy has become inappropriate.  By converting a universal life policy into a new generation solution, the risk cover and savings elements will be separated, which may have an impact on the eventual maturity value of the policy.  If held to maturity, most traditional policies can still provide excellent value for money, cost effective life cover and attractive investment guarantees.  Since converting your universal life policy will affect your level of risk
cover, existing investment guarantees and other policy conditions, you should always seek financial advice before carrying out such a conversion.

Surrender is not a good option
The LOA strongly advises that such a decision should always be the last option, due to the following reasons:

*  Your policy has an element of life cover built into it.  If you
surrender your policy, this life cover will be lost, which may have
disastrous implications for you and your family.  This is particularly important if your health has deteriorated, which may make replacement life cover very difficult to obtain.

*  Hopefully the intention would be to invest the proceeds of the
surrendered policy in an alternative investment vehicle.  With most investment products upfront costs are incurred, particularly if investment advice is obtained again.  The investment return obtained from the new investment will have to be very attractive to justify incurring these investment costs together with surrender penalties on the original policy. Should you want your accumulated funds to be invested in a new generation investment vehicle, a conversion of an existing policy is almost always a better option, at little cost.  A similar calculation needs to be done before you use the proceeds of the surrendered policy to settle debt. 

*  Most universal life policies are invested in smoothed bonus funds, which stabilises the investment return.  These funds, as well as the more recent market linked balanced funds, often provided a guaranteed minimum return at maturity at little or no cost.  These investment guarantees only apply at the maturity of the policy and by surrendering your policy you will lose a very valuable embedded guarantee, which is no longer available at the
same low cost.

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