MAKING SENSE OF INSURANCE TERMS & CONDITIONS

Life insurance is an important aspect of financial planning. It can be used to achieve financial goals such as income protection, building a retirement fund or saving for children's education. However, many consumers do not fully understand the insurance policies that they have bought or make an effort to understand the terms and conditions stated in the policy contract.

MoneySENSE brings to you a case story of a common problem encountered by consumers. At the end of the story, we provide an explanation of some insurance terms and conditions and tips on how you can make better sense of insurance policies. 

Automatic Premium Loan

Mr Tay Eng Fong bought a 21-year endowment policy in 1990. He paid the premiums on a monthly basis through GIRO from a bank account that he seldom used. Mr Tay received letters from the insurance company on a regular basis, but he did not read them. In March 2004, Mr Tay decided to surrender his policy as he needed some cash to start a small business. He was shocked to learn from the insurance company that an Automatic Premium Loan (APL) had been activated for his policy since December 2002 when his bank account had insufficient funds to pay the premiums. His policy was still in-force as the insurance company had taken a loan against the policy's cash value to pay the overdue premiums. The insurance company told Mr Tay that the surrender value (this is the cash value you get if you terminate your policy pre-maturely) of his policy would be lower than if he had continued to service the premiums promptly, as part of the surrender value had been deducted to pay the overdue premiums and interest for the premium loan. Mr Tay questioned the insurance company for activating the APL without his consent. The insurance company explained that the APL feature was contained in the policy contract. Before the APL was activated, the insurance company had sent several letters informing Mr Tay that his premiums were due. Mr Tay's insurance agent had also tried contacting him but to no avail. Mr Tay realized that it was his mistake for not reading the policy contract and letters from the insurance company. As he would be worse off surrendering his policy early, he decided to pay off the loan and continue with his policy.

What is an Automatic Premium Loan (APL) and how does it work?

• APL is a feature found in many insurance policies. If you have not paid your premium within the period of grace (usually 30 days after the premium due date), the insurance company will automatically pay your overdue premium by taking a loan against the cash value of your policy (provided your policy has enough cash value). The insurance company will typically send you one or more reminders if your premium is not paid by the due date.

• Cash value is the amount of cash that your policy will accumulate after it has been in-force for at least 3 years. When you cancel your policy, the insurance company will pay you the surrender value, which is the cash value of your policy at the point of termination. The cash value of your policy is shown in the benefit illustration. Term insurance plans usually do not have any cash value.

• The APL feature is contained in the policy contract. It allows the policy to be kept in-force, thereby ensuring that you continue to receive the insurance coverage under the policy. APL also helps prevent early termination of a policy, which usually involves high costs. You will have to pay interest on this loan.

MoneySENSE Tips for consumers

* Before you purchase an insurance policy, read your contract terms and conditions carefully, including the fine print. Study the benefit illustration and the accompanying product summary carefully to have a good understanding of the policy. If there is anything in these documents that you do not understand, seek clarification from your insurance company, agent or financial adviser¹ (FA). Do not buy anything you do not understand or which does not meet your needs;

* Never sign on blank forms without understanding what you are signing. Do not release your identity card to someone you do not know or without first clarifying why it is need.

* Do your own homework, and never rely on verbal promises made by your insurance  company, agent or FA¹. Make sure you understand what is guaranteed and what is not,  and insist on written documentation on any guaranteed returns or benefits.

* When your application for a policy is approved, you will receive the policy contract.   Once the policy contract is sent to you, there is a 14-day free-look period from the day  you receive the policy contract for you to reconsider your purchase.

* Always read the statements and letters sent to you by your insurance company. If there is  anything that you do not understand, ask your insurance company, agent or FA¹ immediately. 

* If you are paying your premiums through GIRO, make sure that you have sufficient funds in your bank account to service the premiums. 

*  Buying an insurance policy is a long-term commitment. Consider carefully before you terminate or surrender your policy as you would normally suffer a loss for doing so. In the case of a whole-life policy, the surrender value (the sum you get if you terminate the policy pre-maturely) is typically zero in the first three years, or a small fraction of the premiums paid.