Seth’s Blog on Finance

Things to Consider Before Terminating Your Insurance Policy

I have met many clients to review their insurance portfolios and so far have never come across a single insurance portfolio that was properly designed. The best case was when I just had to add in missing essential elements like hospitalisation and disability income coverage. Far more common were worse cases where the person did not have additional budget for proper insurance, or plain could not carry on with the commitments.

At this point they would ask me if it was wise to give up their existing policies to free up budget or to replace them with proper coverage. Here are some things one needs to consider before making a decision.

Do you need the policy’s coverage? Obviously, if you require the coverage for the policy, it will not be a wise decision to terminate the policy at all. One must remember that (proper) insurance coverage represents an essential expense, ranking far ahead of things like broadband bills and annual vacations.

Consider the losses made on your policy if it has a cash value. This is usually one of the first things that come to mind when someone wishes to terminate a policy. While unfortunate, one should also see the losses in perspective – some losses are incurred regardless of whether the policy is held to maturity.

Can your budget accommodate the policy? The weaknesses of most insurance policies come in form of upfront charges in the first few years of the policy. If the policy is already a few years old, most, perhaps all, of the charges have already been incurred and hence there may not be a sensible reason to terminate the policy, unless the premium obligation is taxing one’s budget and preventing proper coverage.

Evaluate whether a replacement policy makes sense. Does it give a higher coverage for the same cost? Does it have better features? Ultimately, does it provide you proper coverage if your existing one does not?

Understand that any new policies will be underwritten based on your current status. While a premium increase due to a slightly older age may not be a deal breaker, one’s health may change, even within a short time. Even though most policies define pre-existing conditions as ailments that one knows (or ought to know, by theory covering pre-existing conditions proven not known to the insured) and most people feel that they are still healthy, a claim on an older policy tends to be less contentious than a new one.

There are some feature that are better on older policies. Some older policies covering critical illnesses have guaranteed premium rates, a feature that is all but extinct nowadays. Some even older policies have less strict definitions on the illnesses covered, being theoretically more advantageous for the insured during claim scenarios.

This list is general advice and by all means exhaustive. One should consult a qualified financial planner for specific and personal financial advice. In most cases, it is best to work around mistakes that were done and committed to. More importantly, one should not be misled into replacing a policy with yet another “junk” product. For everyone else, it is most sensible to avoid making – or be induced into making – financial mistakes right from the start.