Recently, a friend of mine surrendered his 20 year old investment linked policy which he signed up around the same time as mine. I came to know about this because his agent was trying to persuade me to surrender mine as well. I mean, it sounded totally logical because for the same premium that I am paying, I can get many times the coverage. In the case of my friend, his existing insurance company only cover him about RM150k for life whereas for the same premium, he is covered up to 2 million for life and ‘unlimited’ medical health coverage.
In this post, I want to share with you my take on this and before you plan to surrender your old policy, do consider carefully. I am not an insurance agent who is trying to retain you and I do not have vested interest in this. But I have prior experience in the insurance line (not doing sales) and after I explained what I am about to explain to you, I could tell that he regretted his decision.
I would explain the best of my ability. I would not specify any insurance company in this post because I don’t like to finger point at anyone. After reading this, I urge you to call their customer service to find out for yourself if my explanation is applicable to your scenario.
Do note that this post applies only investment link policies that have been purchased for 10 years or more.
What is an investment-linked insurance plan?
Below is the definition provided from insuranceinfo.com.my:
An investment-linked plan is a life insurance plan that combines investment and protection. The
premiums that you pay provide you not only with life insurance cover but part of the premiums will also be invested in specific investment funds of your choice. As a policyholder, you can choose how to allocate your insurance premiums towards protection and investment.
The insurance coverage provided would include death benefit, disability and critical illness.
The investment fund is divided into units of equal value. The prices of these units are published
daily in the newspapers for you to track the value of your investments.
My experience with my investment linked insurance policy
Both this friend and I signed up for the policy around the same time from the same agent about 20 years ago. The agent was my former room-mate who came out to work as an insurance agent. That time, the company that she is affiliated with just launched an investment linked policy. The whole concept of investment was very new in the market.
Because I trusted her, I signed up and got my friend to sign up with her as well. She worked out a premium and we arranged to make repayments to the plan. Later when I got my own credit card, I signed up a standing instruction to deduct straight from my card.
Then 10 years go, I had a group of friends who are insurance agents. Through some talk here and there… I was puzzled why my coverage is lower based on the premium that both my friend and I was paying as compared to their clients who took up the policies around the same time as we did. I checked my policy with the customer service as well as my friends also shared the following with me:
The agent would help to compute the premium based on taking into consideration the customer’s coverage requirements (ie life, PA, critical illness, hospitalization) and repayment capacity. Apparently what this agent did was that there was about RM50 from the RM200 premium that I paid that does not have any coverage or serve any purpose. It was entered under ‘slack’ category. Yet she put it in because she wanted to earn 25% recurring commissions for the first 5 years and she can earn it from that portion as well.
My friends told me that some agents did that to earn more and to meet their target. I was starting to feel quite upset because up until then I was paying the extra premium for less coverage! I signed up a form to switch my agent and was contemplating if I should launch an official complaint.
Until I went personally to see the insurance customer service and found out about the cash surrender value of my policy.
If you buy an investment linked policy years ago, part of the premium you paid are invested in the form of unit trust. Just like any unit trust, the longer you kept it, the more you earn. Because my investment linked was bought when the insurance company first introduced the unit trust, it started at a low price.
10 years ago, the cash surrender value of my policy slightly exceeds the total premium that I paid for it. Meaning if I were to cancel the policy, I am getting back more than I paid for because the profit was able to cover the cost of my medical coverage. Now the portion that you may for medical coverage is burn if you do not have any claims. But because the investment portion was making profit due to age, it was able to offset the medical portion.
I made a mistake by having my premium deducted twice a year instead of monthly. My friend had his premium deducted monthly so he also got the ‘average dollar cost’ advantage. If I had paid on monthly basis, my cash surrender value would have been much higher.
Disclaimer: What my agent did to me has actually benefited me because in my scenario I did not submit for claims. If I needed to claim for medical, I would have been upset because I have gotten less coverage that I should.
What it means by all this
1. Older investment policies are worth keeping because of unit appreciation and higher cash surrender value
Don’t take my word for this. Double confirm with the customer service on the total cash surrender value of your old policy to confirm if it is more than what you paid for.
Because the investment portion of the insurance policy is invested during the early offering of the funds, the NAV (nett asset value) has appreciated very much over the year. Plus with unit split, and with each unit going on to earn a higher price, just to keep the investment portion of the policy is worth it. For my case, the investment portion actually gave a higher returns than most of my other unit trust investments. So for sure I would not surrender the policy as yet.
2. New investment linked policies would be based on much higher unit price
Yes, your coverage may be more. But do note that in the beginning of your policy, your cash surrender value is very low. It will take you at least a decade for the policy to pay itself, if it is possible.
Unit price has gone much higher today. Now, if your premium has very high coverage, it means more of your premium would go towards medical coverage, which actually is burnt if you do not claim it.
It is just like when you sign up for postpaid data plan. Let’s say your postpaid data plan gives you 10 GB of free data per month. If you only use 1GB per month, the rest of the 9GB is burnt and cannot be carried forward to next month.
The amount that is invested to help ‘balance’ your premium would be minimal, given your high coverage and the high unit price. It would in due time help you to cover your premium but it would take at least 10 to 20 years till the unit trust made money. And also you need to see the portion of your premium payment that is being invested. If let’s say your premium is RM500 per month but only RM50 is invested into unit trust…. then I doubt it will be able to break even (where the surrender value of your policy is equal to the premium you have paid for). At this rate, I doubt you can even break even.
3. It may be harder to claim in the new policy
No annual limit medical coverage or all the buzz words may seemed too good to be true. You really need to go through the policy with a magnifying glass to check out the exclusions. Logically, medical costs are rising exponentially over the years. Even though over all our life expectancy are longer but a lot of people are afflicted with chronic illness due to stress, sedentary lifestyle, pollution and eating too much processed food. If the insurance company were to introduce super high coverage and if it is that easy to claim, then the company would go bankrupt in no time.
When you submit a claim especially from private hospitals, they would try to find reasons to decline your claims. It is the same in the past but if you are claiming a much higher amount, you better make sure your situation does not fall under their vague ‘exclusion clause’. I was informally told by an agent that it is not that easy to claim under the new policy.
What other options can you consider other surrendering your old investment linked insurance policy
This is what the options that my friend should have considered before he surrendered his old policy and take up the new one.
1. Check the cash surrender value of the policy
If the cash surrender value is already very high and you have already break even, I would really suggest that you keep the policy for the sake of the investment portion. Do note that policies that are taken up 5 years and below would not have a high cash surrender value.
2. Go for second opinion especially from an independent financial planner
To be very honest, I do not consult from agents who could only sell products from a particular company. I have a long time friend who is a Certified Financial Planner and I go to her for advice with regards to financial planning. She studied for her certification and pass her papers. With her qualification she is able to sell any financial products from banks, insurance companies and fund houses in Malaysia. Hence I know her advice would not be biased because she would be able to recommend the product based on my needs.
She told me that the precisely it was the reason why she decided to be an independent financial planner more than 10 years ago. Originally she was tied to a particular insurance company. She wanted to offer what she felt would be the best product based on her individual client need without being tied to a single company.
3. Adjusting your coverage amount
If you feel you are being shortchanged with the medical coverage your old policy, you can check if you can remove the medical portion so that the premium would be reduced. Consider keeping the old policy for the investment portion. By all means if you could afford it and it makes you feel more secured, then take up the coverage under the new policy.
The above is just my observation and humble opinion. I know when the option is sold to you it really sounds tempting and too good to be true. You may also be a little angry when you feel you are being shortchanged by your old policy.
But things may not be as it seems. Insurance companies are seriously cutting cost and even cutting commissions of their agents in order to remain competitive. They are building online platform to enable their customers to take up additional plans via the self service platform. If the customer signs up add on services or new policies via the self service options, the agents would not earn any commission. Easy to buy but the claims process is always a merry-go-round.
Finally, you also need to consider your current and future finances carefully. If you are the sole breadwinner of the family and (touch wood) get retrenched or you had to resign from your job, are you going to be able to afford this new commitment? I have seen many who overcommitted themselves and when they lose their main income, their insurance policies lapses.
Personally for me, even when I was still having a corporate job, I always ensure that I would be able to afford monthly insurance deductions should I be out of a job. When I was still in corporate, I never thought I would resign from my job so early to be a full time caregiver. At my current situation, I am still servicing my old investment linked policies because I am also using it as a forced savings plan. The cash surrender value of my insurance policy now is more than the total premium I have paid for it. I could never get that with a new policy.
If I fall seriously ill and would require long term treatment, I would not go for private hospital but instead would go for government hospital. It is okay, I am willing to wait alongside with many people just to see the doctor. When I was in corporate I always sought treatment from private hospitals because it was under my company’s medical coverage. I used to be a little cheesed off when the doctors start to do some upselling when they find out my company is paying for my medical bill. There is even a senior eye specialist who told me to go back each month to the hospital to get my eyes checked for glaucoma just because my mom had it (but my age is too young for glaucoma and I know you don’t need to check it every month!). Whereas my mom had always refused to go to private hospitals and wanted to go to government hospitals so I am used to accompanying her. The quality of treatment in government hospitals are not as bad as people make it out to be. No doctor there would be interested to upsell you anything that you don’t need.
I personally known of a few people (and have heard about much more cases as well) where they spent all their insurance claims on private hospital for cancer treatment. But the oncologist still fail to cure them. When the money ran out, the specialist from the private hospital will then write a referral letter to a government hospital of their choice. But by the time they went there they are already on end stage and there was nothing much the government hospital could do. When the patient eventually passes away, the government hospital gets the bad reputation for not being able to cure the patient.