You will be able to work out what you lose by surrendering a policy to buy a new one.
Near the end of a long meeting, Ryan made one more suggestion. Jun Hao's old whole life policy, bought at 26, was "small and old-fashioned". He could surrender it, put the cash towards the new plan, and have everything in one place. It sounded tidy, and Jun Hao was tired. He said he'd think about it, and went home to work out what the switch would actually cost.
Replacing a policy is one of the most expensive things you can do in insurance, and one of the easiest to agree to. This lesson shows you how to price it.
Recall from lesson 1.2, Why premiums rise with age, and how level premiums hide it, and lesson 3.2 that a long-term policy front-loads its costs. Most of the distribution cost is charged in the first years, and the early surplus from a level premium goes partly to reserves. So the surrender value in the early years is far below what you've paid.
Jun Hao's figures, all examples: he has paid S$2,400 a year for eight years, S$19,200 in total. The surrender value today is S$11,000. If he surrenders, he gets S$11,000 back from S$19,200 paid, so S$8,200 of what he paid doesn't come back.
Most people stop the sum there, but that S$8,200 is already spent, whether he keeps the policy or not. The front-loaded costs are paid. From here on, a larger share of each premium he pays on the old policy goes to building value, because the expensive early years are behind him. Surrendering now gives up exactly the years in which the old policy is cheapest to keep.
Whatever replaces the old policy brings its own set of front-loaded distribution costs. Ryan's new plan, from lesson 3.2's example illustration, had a guaranteed surrender value of S$6,000 after five years of S$4,000 premiums, against S$20,000 paid. So for the first years of the new plan, Jun Hao would again be in the stage where his money is worth much less than he's paid.
A switch like this pays for the early years twice: once on the old policy, which he's already paid for, and again on the new one.
A new policy means new underwriting. Jun Hao is now 34, not 26, so the price of cover is higher. On top of that, he now has the slipped disc from lesson 1.3, Underwriting, exclusions and what you must disclose, on his record. The old policy has no exclusions because he bought it before the injury. A new policy might exclude his back from any disability or critical illness benefit, or carry a loading.
The same applies to anyone whose health has changed since they bought: a new diagnosis, a raised blood pressure reading, a referral for tests. The old policy covers those. A new one may not.
Replacing a policy isn't always wrong. It can make sense if the old policy is genuinely unsuitable and costing you money every year, for example an ILP whose charges are eating the account and that's likely to lapse, or cover far larger than any need you have, with premiums you can't afford. It can also make sense when the new policy offers cover you need and can't get by adding to the old one.
Even then, there's often a better route than surrendering. You could reduce the sum assured, make the old policy paid-up and stop premiums, or keep it and buy the new cover separately. Lesson 3.2 covered the options a policy gives you if you stop paying.
Advisers in Singapore are expected to explain the disadvantages of replacing a policy when they recommend it. Lesson 5.3 of Read the fine print: payslips, statements, policies and contracts, Distribution costs, surrender values and the free-look period, shows what that comparison should contain, and Selling financial advice in Singapore: needs-based and compliant, lesson 4.3, Replacing an existing policy without hurting the client, explains the adviser's side.
Ask for it in writing before you agree to anything: the old policy's current surrender value, 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, and how the cover changes.
And never surrender the old policy until the new one has been issued on terms you've accepted and the free-look period has passed. If underwriting comes back with an exclusion you can't live with, you want the old cover still in place.
He laid out the figures. Surrendering would turn S$19,200 of premiums into S$11,000 of cash. A new policy would start another round of front-loaded costs, at an older age, possibly with a back exclusion. And the old policy's S$100,000 of cover already met more than any permanent need he had, as lesson 3.5 found. He kept it, and told Ryan so. Ryan didn't argue.
For one policy of your own, write down the surrender value today, the total premiums paid, and what you would lose by replacing it.
For one policy, write the surrender value today, total premiums 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).