You will be able to work out what you lose if you surrender a policy to buy a new one.
Jun Hao is 34 and holds a whole life policy he bought at 26. Near the end of a long meeting, Ryan calls the old policy "small and old-fashioned" and suggests Jun Hao surrender it, put the cash towards a new plan, and have everything in one place.
Replacing a policy is one of the most expensive things you can do in insurance, and one of the easiest to agree to. The idea sounds tidy and Jun Hao is tired, so he says he will think about it. He goes home to work out what the switch would actually cost. You can price any proposed replacement the same way before you agree to it.
Start by comparing today's surrender value with the total premiums you have paid. Jun Hao has paid S$2,400 a year for eight years, so S$19,200 in total (these are example figures). His policy's surrender value today is S$11,000. If he surrenders, S$19,200 of premiums turns into S$11,000 in cash, and S$8,200 does not come back.
The gap is this large because a long-term policy front-loads its costs. Lesson 1.2, "Why premiums rise with age, and how level premiums hide it", showed that part of the early surplus from a level premium goes to reserves. Lesson 3.2 showed that most of the distribution cost is charged in the first years. In the early years, then, the surrender value is far below what you have paid.
The S$8,200 is already spent whether Jun Hao keeps the policy or not, because the front-loaded costs have been paid either way. After the expensive early years, a larger share of each premium goes to building value. Surrendering now gives up exactly the years in which the old policy is cheapest to keep.
Next, check the new policy's guaranteed values over the same period. Ryan's new plan is the example illustration from lesson 3.2: S$4,000 a year for five years, so S$20,000 paid, with a guaranteed surrender value of S$6,000 after five years.
Any replacement policy comes with its own front-loaded distribution costs. For its first years, your money is again worth much less than you have paid. A switch means you pay for the early years twice: once on the old policy, which is already done, and again on the new one.
A new policy means new underwriting at your current, older age, so the cover costs more. Any change in your health since you bought the original policy can also lead to an exclusion, where a condition is left out of the benefits, or a loading, which is an extra charge. A new diagnosis, a raised blood pressure reading or a referral for tests all count. The old policy covers those conditions, and a new one may not.
Jun Hao's slipped disc, from lesson 1.3, "Underwriting, exclusions and what you must disclose", is now on his record. He bought the old policy before the injury, so it carries no exclusion for his back. A new policy might exclude his back from disability or critical illness benefits, or carry a loading.
Then check whether the old cover already meets your need. Lesson 3.5 found that Jun Hao's S$100,000 of cover already met more than any permanent need he had. With all four costs in front of him, he decides to keep the old policy. When he tells Ryan, Ryan doesn't argue, and Jun Hao keeps his S$100,000 of cover with no exclusion for his back.
Replacing a policy is not always wrong. It can make sense when the old policy is genuinely unsuitable and costs you money every year, such as an ILP whose charges are eating the account and that is likely to lapse. It can also make sense when the cover is far larger than any need you have and the premiums are unaffordable, or when the new policy offers cover you need that cannot be added to the old one.
Even then, there is often a better route than surrendering. Lesson 3.2 covered the options a policy gives you if you stop paying. You can reduce the sum assured. You can make the old policy paid-up, which means you stop paying premiums and keep the policy. Or you can keep the old policy and buy the new cover separately.
Advisers in Singapore are expected to explain the disadvantages of replacing a policy when they recommend a replacement. Ask for the replacement comparison in writing before you agree to anything. It should show:
the old policy's current surrender value the total premiums paid what you would lose by surrendering now the new policy's guaranteed values over the same period any new exclusions or loadings how the cover changes
Lesson 5.3 of "Read the fine print: payslips, statements, policies and contracts", "Distribution costs, surrender values and the free-look period", shows what this comparison should contain. For the adviser's side of replacements, see lesson 4.3 of "Selling financial advice in Singapore: needs-based and compliant", "Replacing an existing policy without hurting the client".
If you do decide to switch, the order matters. First, get the new policy issued on terms you accept. Then wait for its free-look period to pass. Only after both have happened should you surrender the old policy, so that if underwriting comes back with an exclusion you can't accept, your old cover is still in place.
For one policy of your own, write down the surrender value today, the total premiums paid, and what you would lose by replacing it.
Pick one policy. Write down its surrender value today, the total premiums you have paid, and what you would lose by replacing it.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).