Do we really need to keep paying for life insurance?
I HAVE been asked by an employed 65-year-old if there is a compelling reason for him to keep a life insurance policy of 36 years even though there is a big difference between the surrender value and the insurance value if it is cashed in.
Whole-of-life insurance is a combined investment and insurance plan that was offered in the Australian market since the 19th century. Considered inflexible and expensive, their popularity declined in the 80s as life insurance companies developed separate Insurance and investment/savings products that were 'unbundled' from each other. Whole-of-life insurance policies have not been offered in the Australian market since the late 90's for new business.
A whole-of-life policy comprises the basic sum insured, the annual bonuses and the 'terminal' bonuses.
The basic sum insured was the insured value when the policy commenced. The annual and 'terminal' bonuses are the compounded return on the basic sum insured from commencement to now.
Whole-of-life insurance policies pay out the combined value of these three components on death or on the insured person reaching age 95. If you cash in or surrender the policy prior to age 95, you only receive a proportion of the value of the annual bonuses and none of the 'terminal' bonuses.
There are alternatives to cashing in or surrendering the policy.
If you don't need the money now, but don't want to wait until age 95, policies can be converted to mature with a minimum of five years notice. Policies with a maturity date prior to age 95 are referred to as endowment policies.
Whole-of-life insurance policies can be converted to endowment policies, preserving the full benefits on death or maturity as opposed to the cash value now. In most cases, the proceeds of whole-of-life insurance policies will be tax-free when cashed in or matured.
Alternatively, you can sell your policy in the secondary market. The capital guaranteed nature of these policies make them attractive investments for those looking for fixed interest returns. Australian Policy Traders has been buying and selling policies since 1999. Go to www.austpolicytraders.com.au.
They will pay you up to five per cent more than the surrender value of AMP, AXA or MLC Insurance policies.
Other options for these policies include cashing in a proportion of your bonuses or borrowing against the surrender value.
Some people may choose to retain whole-of-life policies for estate planning purposes as the policy provides a lump sum for beneficiaries on death. The fixed annual premium for the insurance makes the cover relatively inexpensive compared to the rising cost of term life insurance.
If seeking advice on your policy options, make sure your adviser understands how these policies work and how to optimise their benefits.
What about personal life insurance?
If you and your husband don't have children, own your house and don't have debt, there is no compelling reason to retain your personal life insurance.
My firmly held view is that the purpose of insurance is to maintain the status quo in the event of an unforeseen event. If you have sufficient assets to maintain your lifestyle at an accepted level in the event of disability, then it would be hard to see a need for income protection or total and permanent disability.
Likewise, if the surviving spouse does not need funds to repay debt or replace income on the partner 's death, life insurance may not be required.
If you feel you have no insurable need, stress test your thesis. Work through the scenarios on a 'what if basis'. Consider the impact of unexpected medical care or rehabilitation costs. Likewise, the loss of income to care for a spouse. Make sure you take into consideration your short and long-term financial planning needs. For example, would your retirement funding goals be met if you couldn't work?
If you have satisfied yourself that you are financially secure both now and under any insurable scenario, then you may not need insurance.
I would encourage you to get a financial planner to confirm your view just in case.
Q&A with The Coach first appeared on www.wealthpartners.net.au. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.