People may draw on the accumulated cash value of their policy when they need cash for big-ticket items such as financing a child’s university education or putting a down payment on a new home. When you’re low on funds in times of economic uncertainty, capturing the cash value in life insurance can help you avert a cash flow crisis, by freeing up cash for essential financial commitments such as paying your utility bills or medical fees.
Here, we list five options for tapping the cash value in your policies, and what you need to take note of.
Convert your policy into a non-participating policy using your policy’s cash value:
1. Reduced paid up insurance policy (RPU) or
2. Extended term insurance policy (ETI)
Upon exercising either of the two options above, you’ll no longer have to pay premiums but your benefits will be reduced. With RPU, you’ll get the same coverage term but reduced sum assured. For ETI, you’ll get the same sum assured but you’ll be covered for a shorter term. If you choose either of these options, your policy will be converted into a non-participating plan using the policy’s cash value, and will no longer have any cash value nor receive any bonuses.
Although these options above save you from forking out your own money during economically shaky times or when you’re no longer earning an income, keep in mind that they may disrupt your long-term plans due to the reduced benefits.
3. Automatic Premium Loan (APL) a.k.a. Automatic Non-forfeiture Privilege
This is where your insurer initiates a "loan" from your policy’s cash value to pay your insurance premiums, on your behalf. Just as your policy’s cash value would have accumulated interest had it not been tapped, this loan accumulates an interest charge that you’ll need to pay back. This option will allow you to have one less bill to think about while your cash in hand can be used for other expenses, and you’ll continue to be covered under your policy.
APL is automatically activated when your policy premium isn’t paid by the end of your grace period. It can only be activated if there is enough cash value in your policy and will continue to be activated as long as premiums aren’t paid, until the cash value is used up. However, when the cash value is used up, your policy will be terminated. If you’re confident that you’ll be able to pay the premiums and interest in the next few months or before all your policy cash value is used up, APL might be a viable option as it will not compromise your coverage term or sum assured.
4. Policy Loan
If you need to fund a big expense such as your child’s university education, there’s the option of taking out a loan against your policy provided it has ample cash value.
Just like any other loan, you’ll still have to make repayments. Remember that the loan amount, plus interest, will be deducted from the benefit payout, should you make a claim before returning the loan amount.
5. Partial / full surrender
If your income is affected by COVID-19 and you need cash for household expenses, you can make a partial or full withdrawal of cash value from your policy. This is the same as a partial or full policy surrender. It’s where you submit an application to fully surrender your policy and withdraw the cash surrender value or you partially surrender your policy by reducing the sum assured of the base plan and withdrawing a portion of the cash surrender value. The cash can be used as emergency funds to tide you through a crisis.
After a full surrender, the policy will terminate. But should you decide on a partial surrender, the premiums, cash value and benefits of the policy will be reduced accordingly.
Caution should always be exercised with any form of surrender as early surrender of the policy usually involves high costs and the surrender value that is payable may be less than the total premiums paid.
No matter which option you prefer, always consult your financial adviser representative first, so you can make an informed decision. The above information may not be exhaustive so it’s important to find out about any penalties, the possible impact on your policy and whether there could be a protection gap in terms of coverage.