• Sharebar
Life Industry
Tuesday, February 1, 2005
Alternative Strategy

To surrender policies without looking at alternatives is irresponsible and rarely in the best interests of the policyholder.
Gerry Anderson, deputy executive officer: market conduct and consumer education of the Financial Services Board (FSB) said he did not believe that it was in the interests of the investor for anyone to suggest that their insurance policies should be cancelled, made paid up or surrendered. “The FSB supports fair criticism where necessary and believes that many existing long-term assurance products are still suitable for the purpose for which they were purchased.”
The long-term insurance industry strongly recommends that policyholders consider all aspects relating to their portfolios before making a decision to surrender any of their life policies.
Universal life and reversionary bonus policies were designed and sold in an environment where flexibility of investment vehicles did not receive a lot of attention. These policy contracts have been optimised to provide a combination of death and disability cover with an attractive maturity value, but the early termination values do not provide good value for money. Life insurance companies have not tried to keep this a secret. In fact, members of the LOA clearly disclose and highlight the costs involved when a policy is surrendered to be replaced by a new investment vehicle.
Most life offices have recognised that times have changed, and that clients need access to cost effective solutions to convert their traditional policies to new generation products with separate investment and risk cover policies. Should your needs change it is usually the best option to convert your accumulated fund value into a new generation savings policy, which will provide you with access to a range of tailor made investment funds, with full flexibility to switch between these funds to adapt to your changing circumstances.
However you should only contemplate such a conversion if your financial needs have changed to such an extent that your existing policy has become inappropriate. By converting a universal life policy into a new generation solution, the risk cover and savings elements will be separated, which may have an impact on the eventual maturity value of the policy. If held to maturity, most traditional policies can still provide excellent value for money, cost effective life cover and attractive investment guarantees. Since converting your universal life policy will affect your level of risk cover, existing investment guarantees and other policy conditions, you should always seek financial advice before carrying out such a conversion.
The Life Offices’ Association emphasis that it is definitely not the best option to surrender your policies. You do not have to incur surrender penalties, and you also do not need to incur any new upfront costs. It strongly advises that such a decision should always be the last option.
Your policy has an element of life cover built into it. If you surrender it this life cover will be lost, which may have implications for you and your family. This is particularly important if your health has deteriorated, which may make replacement life cover very difficult to obtain.
Hopefully the intention would be to invest the proceeds of the surrendered policy in an alternative vehicle. With most products upfront costs are incurred, particularly if investment advice is obtained again. The return obtained from the new investment will have to be very attractive to justify incurring these costs together with surrender penalties on the original policy. Should you want your accumulated funds to be invested in a new generation vehicle, a conversion of an existing policy is almost always a better option, at little cost. A similar calculation needs to be done before you use the proceeds of the surrendered policy to settle debt.
Most universal life policies are invested in smoothed bonus funds, which stabilises the return. These funds, as well as the more recent market linked balanced funds, often provided a guaranteed minimum return at maturity at little or no cost. These guarantees only apply at the maturity of the policy and by surrendering your policy you will lose an important embedded value, which is no longer available at the same low cost.

Copyright © Insurance Times and Investments® Vol:18.1 1st February, 2005
524 views, page last viewed on July 4, 2020