Q WHEN it comes to personal insurance, I must admit I'm really clueless. I have an insurance policy with a sum assured of $125,000. I am paying about $400 monthly.

I received the annual statement:

- Bonus/Paid-up Additions: $18,800

- Cash Dividends: $0

- Loan: $13,700

- Prepayment: $0

As I do not have the means to pay off the lump sum of the loan amount, am I better off letting go of this policy? What is your advice?

I'm servicing two other policies purchased three years ago.

A WE ALWAYS start by first evaluating the full insurance needs of the person. Do you need the $125,000 coverage to begin with? Is it too much or too little?

What is the main objective of this policy in the first place?

The reason for this question is that some people treat an insurance policy primarily as a form of savings, with the insurance protection coverage as a secondary benefit.

Whether the policy in question is providing a benefit or an unnecessary cost would depend on the person's current life stage and needs.

That said, insurance should first and foremost do what it is supposed to do: provide for the policyholder and/or dependants in the event of any foreseeable or unforeseen circumstances.

Life insurance is required primarily for dependants' financial protection. If you are the sole breadwinner and have dependants, then the decision to drop the policy will be based on the overall protection required and current available coverage.

So if a person is single and has no one depending on him, such protection may not be required or will be less. The primary types of protection needed for singles are income replacement, critical illness and hospitalisation cost reimbursement.

However, most singles also have dependants such as aged parents or maybe even disabled siblings, in which case life insurance (for dependants) will still be required.

Another use of life insurance is for estate planning, but that's a separate topic altogether and is too complex to be discussed here.

Next, does the $125,000 coverage include critical illness coverage, or does it cover death and total permanent disability? If it has a critical illness portion, does it provide coverage for whole life or does it stop at a certain age, say 60 years old?

It is important to do this assessment, as there are many types of critical illness coverage that cease at an advanced age. This may not necessarily be an ideal situation, if the policyholder loses the coverage when most health-related risks are usually at their highest levels.

And what are the types, scope and amount of coverage for the other two policies that you have? Are they traditional or investment-linked type policies (ILPs)?

If they are ILPs, we have to assess if you are better off buying term policies and investing the savings in a pure wrap account with unit trust funds.

These are some of the facts to consider, based on your actual needs, to determine the relevance of this $125,000 policy.

If this coverage is found to be unnecessary after a financial review, then it is probably better for you to cancel the policy.

If the coverage is needed, then given your current financial situation, it may be better fulfilled with a term policy.

A full financial review and understanding of the client's health status is required to determine the appropriate solution, bearing in mind that premiums will be higher based on the insured's age and health/medical conditions.

Having said that, we would like to know the reason for taking up the loan from the insurance policy.

Loans from personal policies are made available for most types of plans, usually after three years of policy inception which provide cash values.

We would caution you against borrowing from the cash values of the policy, as it would affect the primary objective of the policy, be it for savings or protection.

We would encourage you to review all other possibilities in managing your finances and/or debts prior to turning to any form of loan facilities.

After all, loans taken would become liabilities inherited by dependants, in the event of the policyowner's sudden death.

We have assumed the current policy to be a traditional participating type of plan with no riders attached, based on information provided about the features.

You have not provided us with the relevant information required, and we would advise you to seek the help of a professional financial adviser.

Tan Siak Lim
Business Unit Director
Alpha Financial Advisers

Advice provided in this column is not meant as a substitute for comprehensive professional advice. E-mail questions to a1admin@sph.com.sg.

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