MAKING SENSE OF YOUR INSURANCE POLICIES

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 their policy contract.

MoneySENSE shares a case story of a common problem encountered by consumers. At the end of the story, we provide an explanation of some insurance terms as well as tips on how consumers can make better sense of insurance policies. 

Case Story

In 1996, Ms Zuraidah bought a 13-year participating endowment policy with a sum assured of $50,000. According to the 2003 anniversary statement from the insurance company, the reversionary bonus of her policy as at the end of 2003 amounted to $7,300. In February 2004, Ms Zuraidah decided to surrender her policy as she had difficulty servicing the premiums. She was surprised to find out that she could only obtain the cash value of the reversionary bonus amounting to $4,800 if she terminated her policy prematurely. As Ms Zuraidah needed the extra cash badly, she went ahead to surrender the policy even though she knew that she would have received  a higher value for her policy had she held it to maturity.

What are participating life insurance policies and reversionary bonuses?

* Participating life insurance policies are policies where you share in the profits or losses of an insurance fund through the distribution of bonuses. Examples of participating policies include participating whole life policies and endowment policies. Non-participating policies such as term insurance and investment-linked policies are not entitled to bonuses.

* Reversionary bonus is a type of non-guaranteed benefit of a participating life insurance policy. However, once declared by the insurance company, reversionary bonus becomes a guaranteed benefit. Reversionary bonus is paid over and above the guaranteed benefits of a participating policy, and increases the cash value (or surrender value) of a policy.

* Participating policies usually build up cash values after a certain period. Cash value is the cash amount which an insurance company will pay a policyholder when he cancels or surrenders his policy prematurely. Cash values are typically paid only if a policy has been kept in force for at least three years.

* Reversionary bonuses are designed to be paid in full upon death or maturity. If you surrender your participating policy prematurely, the cash value of the reversionary bonus you would receive is lower than the amount of reversionary bonus that has been declared. This is to discourage policyholders from terminating their insurance policies early as insurance policies are meant to be long-term products. The cash values of the projected non-guaranteed benefits are shown in the Benefit Illustration.

MoneySENSE tips for consumers

* Before you purchase an insurance policy, 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 life insurance adviser.

* Read your contract terms and conditions carefully, including the fine print. Ask your life insurance adviser to explain all calculations to you in writing. As the terms and conditions may not be exactly the same for every life insurance product, you should check the details of your policy with your adviser.

* Do your homework, and not just rely on what your life insurance adviser has told you. Do not buy anything you do not understand or which does not meet your needs.

* 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 check the statements sent to you by your insurance company. If there is anything that you do not understand, ask your life insurance adviser immediately. 

* 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 cash value is typically zero in the first three years.