In the past week, thousands of anxious AIA policyholders had rushed to the offices of insurer AIA Singapore to surrender their plans.
Many were stricken with fear when they heard about the possible collapse of AIA's parent firm American International Group (AIG) and were concerned that their hard-earned savings, which are embedded in their policies in the form of cash values, would go up in smoke.
Despite an announcement last Tuesday morning that AIG was being rescued by the United States government, many still wanted to cash out their policies. The situation improved only towards the end of the week.
The rush led to calls from financial experts, the Monetary Authority of Singapore (MAS) and the Life Insurance Association urging AIA customers not to act rashly.
The main reasons they cited were that customers who surrender their policies prematurely may suffer losses and lose insurance coverage when they may still need it.
If you are still thinking of surrendering your AIA policies, here is a checklist of factors for you to consider. If you have just surrendered your policy in the past one week, AIA is willing to reinstate your whole life and endowment policies with no penalties.
Do you need the insurance coverage?
If you still need the coverage, it is not prudent to terminate the policy hastily. If you so decide, you should at least obtain a new policy first before surrendering.
Are you in good health?
If you still want coverage, you may not be able to buy a replacement policy elsewhere, particularly if your health has deteriorated since the time you bought your original plan. In some cases, you may be loaded with additional premiums or even be excluded for health conditions, such as diabetes or hypertension, that could have developed since you last bought your AIA plan, said financial adviser Providend's head of risk management and special projects, Mr Eddy Cheong.
Mr Patrick Lim, associate director of financial advisory firm PromiseLand, highlighted that if a new 30 critical illness benefit plan is taken up, there is a waiting period of 90 days for up to four critical illnesses - namely major cancers, heart attack, coronary artery bypass surgery and angioplasty. No claim for any of these will be paid during this period.
Have you checked the cash value of your policy?
By finding out the cash value, you will be able to know if you have broken even - that is, whether the cash AIA returns to you upon termination will be more than the premiums you have paid up so far.
Early policy termination usually means a huge surrender penalty. As insurance plans, particularly whole life and endowment, are structured as long-term contracts, early surrender means you are unlikely to break even and this may mean losing a significant portion of your premiums.
Paying higher premiums for your next policy
Because you have grown older since the time you bought the AIA policy that you are planning to terminate, you will have to pay a higher premium now for your next plan. This is because premiums go up with the entry age. This higher premium will apply for the life of the policy, said former president of the Singapore Insurance Institute Stanley Jeremiah.
Mr Leong Sze Hian, president of the Society of Financial Service Professionals, worked out that a 35-year-old who bought a whole life plan in 1995 with a sum assured of $100,000 would be paying annual premiums of about $2,200. If he terminates the policy and buys a new plan today with the same sum assured, his annual premium would be a higher $3,800.
Losing your entitlement to terminal bonuses
A terminal bonus is paid out upon death or when the policy matures. Many policies were sold on the basis of lower regular bonuses and higher terminal bonuses, so by surrendering prematurely you would be essentially forfeiting your terminal bonus, said Mr Jeremiah.
Should you terminate your term policies or medical policies now?
Mr Cheong and Mr Leong said that since such policies do not have any cash value, terminating them during the current crisis does not make sense. On the contrary, you lose the protection that you would probably need.
Should you terminate your investment-linked policies (ILPs)?
If you have an ILP, besides checking if you are subject to early surrender penalties, your decision to surrender must be based on your investment amount against the current worth of the policy.
With the current market conditions, cashing out at a loss means you have no chance of recovering your investment, whereas if you stay invested there is a chance that you may do so, said Mr Jeremiah.
In addition, Mr Leong pointed out that ILPs are managed by various fund managers and held in trust by custodians.
'They are not the assets of the insurance company. So, there is no connection with any financial risks of the financial institution,' he said.
Alpha Financial Advisers' chief executive Arthur Lim suggested that ILP customers check with the insurer if the funds they have invested in have any exposure to Lehman Brothers or AIG or any of the financial institutions recently in the spotlight, and if so, whether the exposure is significant.
Is AIA really going bust?
It seems the risk is much lower now with the bailout of AIG and the positive statements from MAS and AIA on the sufficiency of assets to meet policyholders' obligations, said Mr Cheong.
Taking a loan on your policy
This was an option for several AIA policyholders last week.
They wanted to take out most of the cash value of their policies, but continue to enjoy the coverage by keeping their policies in force.
A loan can be taken on your policy, up to 90 per cent of its cash value. Mr Jeremiah gave this example: I may have a $100,000 critical illness policy with a cash value of $5,000. If I take a loan of $4,000, I have extracted most of the cash value but the policy remains in force for the sum assured of $100,000. If I get a critical illness, AIA is still liable for the $100,000 less the $4,000 loan I took, that is $96,000.
Depending on when the policies were effected, the loan rate of interest is 6 or 8 per cent. The interest may be higher for foreign currency policies, said Mr Leong.
Upon maturity, the loan interest accrued will be offset against the maturity proceeds. However, be very clear that future premiums must continue to be paid, otherwise the policy lapses.
This article was first published in The Straits Times on September 21, 2008.
