I have had an old whole-of-life insurance plan for 36 years and I am considering cashing in the policy as I don’t need the life insurance any more. There is a big difference between the surrender value and the insurance value if I cash it in. Am I doing the right thing or are there other alternatives I should look at? I am 65 and still working.
Considered inflexible and expensive, whole of life insurance is a combined investment and insurance plan that was offered in the Australian market since the 19th century. Its popularity declined in the 1980s as life insurance companies developed separate insurance and investment/savings products. Whole of life policies have not been offered for new business in the Australian market since the late 90s.
A whole of life policy comprises the basic sum insured, annual bonuses and terminal bonuses. The basic sum insured was the insured value when the policy began. Annual and terminal bonuses are the compounded return on the basic sum insured from start to now. Whole of life insurance policies pay out the combined value of these three components on death or on the insured person reaching age 95. If you cash in or surrender the policy before age 95, you receive only a proportion of the value of the annual bonuses and none of the terminal bonuses.
There are alternatives to cashing in or surrendering the policy. If you don’t need the money now but don’t want to wait until age 95, policies can be converted to mature with a minimum of five years’ notice. Policies with a maturity date before age 95 are referred to as endowment policies. Whole of life insurance policies can be converted to endowment policies, preserving the full benefits on death or maturity as opposed to the cash value now. In most cases, the proceeds of whole of life insurance policies will be tax free when cashed in or matured.
Alternatively, you can sell your policy in the secondary market. The capital guaranteed nature of these policies makes them attractive investments for those looking for fixed interest returns. Australian Policy Traders (www.austpolicytraders.com.au) will pay you up to 5 per cent more than the surrender value of AMP, AXA or MLC insurance policies.
Other options include cashing in a proportion of your bonuses or borrowing against the surrender value. Some people retain whole of life policies for estate planning as they provide a lump sum for beneficiaries on death. The fixed annual premium for the insurance makes the cover relatively inexpensive compared with term life insurance. If seeking advice on your options, make sure your adviser understands how these policies work and how to optimise their benefits.
Article by – Andrew Heaven, financial planner at WealthPartners Financial Solutions.