Maximise your life insurance surrender value.

Most of my clients are age 50 and above. Many of them have hold on to their life policies for 20 over years when their children were young. It is quite normal that some of them are seeking to surrender their policies for the cash values since the life insurance is no longer required.

Below are some experiences i have in assisting this group of clients to get the maximum cash value from their policies. I shall limit my discussion to traditional whole life policy. In my subsequent blog, i will touch on the investment-linked policy matter.

1. Get a current cash value illustration from the insurance company.

The annual statement which the insurance company send to you show only the sum assured and reversionary bonus of the policy. This is the value realise upon claim, and not upon surrender.

Therefore, you can request a copy of illustration showing the cash surrender value.

2. How to read the cash value illustration

The cash value illustration will show the (a) Guarantee cash value, (b) cash bonus or dividends. For policy that is above 20 years, some insurance company might have a third cash component call (c) terminal bonus.

Your surrender value will therefore be the total of item (a), (b) and (c).

3. Time your surrender

Time your surrender to approximately one month after the anniversary of your policy. This is to gain the maximum bonus/dividend and terminal bonus of the policy. This is because the insurance company declares the rate of of bonus after one full year of your policy.

Let me further illustrate this point. Assume your policy anniversary date is October each year. Try not to surrender your policy before October (say September). In this way you will lose out on the declare bonus for this year (as most insurance companies practise "yearly rest" accounting treatment for the bonuses or dividends). Instead, surrender your policy on November or December. In this way, you will enjoy the full bonus declared on your policy for that year.

4. Ask about the terminal bonus or dividend

If you have hold your policy for 19 years, it would be beneficial to ask the insurance company whether terminal bonus will be paid on your policy on the 20th year. Terminal bonus is a practice by insurance company to add extra bonuses onto a life policy which has been in the book for a long time. Terminal bonus can sometime be substantial.

One insurance company pays terminal bonus 100% of the total dividend on a policy which is 25 years and above! Let me show you the figures on this example. One month before 25th year of this policy, the cash value is as follows:

1. Guaranteed cash value $65,800
2. Divdend $50,000
3. Total surrender value = $65,800+$50,000 = $115,800

One month after 25th year of the same policy, the result is as follows:

1. Guaranteed cash value $66,000 (with new dividend declared)
2. Dividend $53,000 (with new dividend declared)
3. Terminal dividend = $53,000 (100% of dividend)
4. Total surrender value = $66,000 + $53,000 +$53,000 = $172,000

So, now you see the difference of one month on the same policy : $56,200!!

In conclusion, it is worth while to manage and maximise your insurance surrender wisely.