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Saturday, April 8, 2017

I Surrendered My Whole Life Policy And Lose 80% Of My Capital

I thought this will be a good case study to look back on what I did recently at some point in the future.

I would not call this a mistake that I did because I think the policy has served its purpose for the past 4 years which I no longer needed it anymore. Still, if there is a mistake to point out, it'll be that I'd be better off taking term back then. 

Well, time cannot be rewind, so I guess life moves on from here.




My WL Policy

I am not an expert in this insurance area and is/will never be an area that will interest me so I am not comparing my policy to any benchmark or competitors.

My WL policy is a straightforward deal from Prudential multiplier which will cover me a sum assured of $500k upon ceased. This multiplier will be effected until the age of 60 before it will revert back to the original value of $167k.

I chose a 15 year option paying a premium of $543 every month and have been paying them the past 3+ years before I decided to surrender.

I paid a total premium of about $20k approximately during the course of my policy.

Surrender Value

I was informed by an acquaintance in facebook that I can check out alternate 3rd party company that might be willing to buy over my policy.

I checked with purvis capital whether they will be able to offer a higher surrender value but the conclusion is they are not because the duration I have with the policy is too short. Else, usually on average they would be able to buy your policy at a 5% higher than the surrender value you might have with the insurance company.

In the end, I managed to receive a surrender amount of $4k, which sums up to about 20% of the total premium I've paid. The loss is 80% and about $16k in absolute value.

Why Did I Surrender?

This is a personal reason so I am sure there would be people who might disagree with me.

I reviewed my needs and cashflow and decided that my family no longer needs the policy as much as they did should something happened to me today as compared to 3 years ago. The amount of quantum we are talking about is always going to be subjective but we agreed and decided on what is enough.

Someone could argue that the policy can also be a good form of endowment in other uses, i.e if I keep them throughout the full 15 years and redeem them the next 20 years or something. I am not a big fan of endowment myself so that's something not in my plan at all. Still, I think it's worth mentioning that it CAN be useful to particular individual with certain needs so it is wrong to say that they are a total crap.

With more cashflow on my hand, I can have an alternate way to build up my wealth in different aspect which I think can also serve as a form of defense. Like a team of Barcelona, Offense is often a good way of defense. If you cannot defence, score more goals. But I think there needs to be at least some basic defence there and I think I've established that (not going into the details here).

How Do I Feel?

If there were anything to highlight, I think this part would be the most important of the lots.

First, I thought it was important to acknowledge that I have made a mistake buying a WL instead of a term.

Second, it was also important that I put my emotion aside, review my needs and decide on things swiftly. I could have let it dragged on for a few more years before deciding to withdraw and thought it was foolish. I thought it was important to be decisive and not wishy-washy about things. 80% loss, take it with stride and life moves on from there.

There are at least about 5 people in my circle of friends who thought that I would be suffering in this painful loss.

I guess this is the same with why people are frustrated with CPF because they are assuming CPF to be money that they would be depending for future retirement. In wealth building, I think it is prudent and conservative not to include them as part of our retirement strategy. So anything that comes out of it is a bonus, not a privilege.

I don't want to give the impression that thinks that I belittle this amount of money but it is usually part of my conservative ways in building wealth strategy to exclude these particular things in my computation by taking a 100% provision so instead of feeling like a loss, it feels like a gain to me.

Yes, I know it is pretty silly to look at it that way, but my cashflow is actually better this month by $4k because of this.

* Again, this is a disclaimer to highlight that the products do not suit my needs at this point but does not mean it does not suit any individual at any particular point of time. Just need to be clear about that.


17 comments:

  1. Hi B
    My Husband bought a lot of insurance policy and I not sure what is about . I only knew he spends about 2-3k per month for the Insurance.


    So as for me, because I am sick, so I save most of my salary and dividend as emergency fund.

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    1. Hi Yeh

      I'm sorry to hear about your conditions. I think a person knows one situation best when they are faced with real life difficult situation, not simply a hypothesis.

      I hope you will recover soonest because i've heard about you and how determined you are as a person.

      Delete
  2. I think most if not all insurance plans have their roles it is whether they are suitable for the people who bought them.

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    1. Hi starlight

      Yes absolutely agree.

      The policies are there to suit different needs but the matching of the product to the needs are often misaligned because either one doesnt know how to evaluate or an insurance agent has misalignment of interests.

      Delete
  3. B,

    You can take a loss!

    That's good training for the future as we get better with more practice :)


    Your reflection shows maturity.

    1) Admission of mistake and no sugar-coating. Most would blame the agent or big daddy for not including insurance as part of our school curriculum ;) (Don't laugh! Got people complain schools never teach us to be financially literate!?)


    2) Most would AVOID making a decision and taking corrective action even though they knew it was a mistake.

    The loss has already happened whether you end the policy or not. Avoiding the problem is just letting a small hole turn into a bigger one.

    I'm sure even if you had bought term 3 years ago, and if discover it has outgrown its purpose, you would have terminated the term policy today even if its a lot "cheaper" ;)

    Impressed.

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    1. Hi SMOL

      Thanks!! I was expecting a bash from you, haha kidding.

      There's a lot of reflection and learning I've come out from this simple case so I think intangible wise I might argue to have come out as a winner.

      Delete
  4. Heheh, these days there's never anything straightforward with participating insurance (wholelife & endowments). Unlike 30 years ago when such things were definitely much more straightforward and no gimmicks with all kinds of if-else algo and step-up/step-down conditions. And even back in 1990s certain insurance companies already had reputation for expensive gimmicky products with hardsell agents.

    For really straightforward term insurance, you can look at Mindef/MHA Group Term --- 41 cents per month for every $10K sum assured for death & TPD. You can also add on riders for CI, early CI, disability income.

    IMHO, this is the only benefit for doing NS. No other insurance plan comes close to the cheap pricing. Even for other so-called cheap term insurance, they would have to give you 50%-70% discount to match this Mindef/MHA Term insurance. The pricing now is similar to US Armed Forces term insurance for their troops, which I had been harping to Mindef for 10+ years previously. Which is a damned good deal considering that US troops chance for claiming is so much higher than Sinkie NSmen.

    ReplyDelete
    Replies
    1. i was reading this on another blog. one of the poster was saying that, in an event of XX members claiming for the same unfortunate event, say a plane crash for eg. the payout is Y% of your so-called sum assured. so if your plan is, say, 1mil term. the payout will not be 1mil, it will be potentially much much less. i assume they have a formulae for this.

      of course, there are alot of moving parts to this equation; lots of "what if this..." , "what if that.."

      guess thats one of the reason, they can afford to give cheaper premiums for group insurance?

      Delete
    2. Formula is 0.75% of Aggregate Sum Insured of all similarly insured people who die in same incident.

      A major improvement in the latest contract that Mindef/MHA signed in 2016 is that this limitation is now only for war or terrorist situation.

      So if plane crash due to engine failure / pilot go crazy & crash plane etc is now covered i.e. you get the full sum assured.

      Note that normal insurance also have certain limitations for war & terrorism events, but not so terok as group insurance. That's why group insurance can be cheaper ... not just cheaper but f__king cheaper.

      Delete
  5. You could have consider a reduction in Sum Assured to retain the WL policy. This should reduced your premium commitment and you could continue as a protection plan to complement your other protection policies. You might received a return of premium corresponding to the reduced Sum Assured and you would not have lose 80% of your past commitment.

    A WL typically break-even around 17-19 years of its policy life. Treat it as a protection plan, rather than a saving plan, will not disappoint you in terms of its returns.

    Use a term policy to complement your protection needs so that you can save on your overall commitment to insurance premiums. By the time your term policy expired, (hopefully) your WL policy would have accumulate enough cash values to maintain your protection needs without heavy premium payments. Best if you'd fulfilled its limited premium period so that you can enjoy rest-of-life coverage without premium paying.

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  6. Respect ..Cutting loss is a very very hard thing but u did it.

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  7. Congratulations B!

    Its definately a hard move but i believe a person with good investment knowledge like yourself, would earn the money back in no time soon by fully ultilising that $500+ u have to forfiet every month.

    Similiarly like you, ive surrender my pruflexi cash endowment 2 years ago and lost about $11k because i believe i can get better ROI from that (which i already did).

    Im sure with this u shld be reaching your $1 mil portfolio very soon!

    Jeff

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  9. It's a keep for me. Insurance can serve its purpose. If nothing happen, there will be a cash value later. Anyway, thanks for sharing.

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  10. i share your pain.
    going to terminate my AXA HealthPro Growth as well after 4 yrs.
    12k lesson.

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  11. Hi, just curious, was there a CI payout element?

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  12. I get phobic whenever I hear about WL with 15-year premiums.
    I had bought AIA Financial Guardian WL with 15-year premiums (which they termed Critical Year feature) bought in late 1980s. Then one day in 2003, they dropped the bombshell that policy holders need to keep paying premiums beyond 15 years as there was insufficient dividends to sustain the recurring annual premiums. Read that about 110,000 policies were affected. Many, including myself, bit the bullet and terminated our policies.

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