When looking at buying Traditional Whole Life Limited Pay insurance policies, why would one surrender your policy for the cash value?

I'm young ~24yrs old and learning about life insurance.

For example, a WL (up to 99yrs old), 25yr limited pay policy:
100K coverage (Death, Disability, CI)
Total paid premiums at 25 yrs: 50K
Surrender Value at 25 yrs: 30K

Why would anybody want to surrender the policy for cash value if it means giving up the policy coverage?

If it does not make sense to surrender a fully paid up WL plan, should we just count the amount of premiums paid (without subtracting cash val) as the cost of insurance?

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Elijah Lee

08 May 2020

Senior Financial Services Manager at Phillip Securities (Jurong East)

Hi Jiachao,

You never buy whole life to surrender it. It's supposed to stick with you for the whole of your life, and it is designed to pay out only in the most dire of circumstances (death/TPD/CI).

Your statement of "Why would anybody want to surrender the policy for cash value if it means giving up the policy coverage?" is precisely the point. You buy a policy for its coverage, not the cash value. The growing cash value merely helps to buffer for inflation over the years (which is still important).

Pretty much no matter when you claim, the payout from claiming is always more than the surrender value. Insurers have an expected probability of paying out the full claims build into the premiums and if you surrender the plan, they will make money since, instead of paying it out in full (since one will eventually claim on a whole life, we will all pass on some day), they just pay you the cash value.

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Pang Zhe Liang

08 May 2020

Fee-Based Financial Advisory Manager at Financial Alliance Pte Ltd (IFA Firm)

When to buy Participating Whole Life Insurance

Generally, we buy a whole life insurance policy because we want to be covered for life.

More Details:

What is a Participating Whole Life Insurance Singapore

When to buy Whole Life Insurance Singapore

Deviation

However, circumstances may change and our priorities may deviate from our intial goal (to have whole life coverage). Consequently, we may be forced to give up the life insurance coverage, e.g. due to inability to pay premium.

Meanwhile, we may realise that we do not need the life insurance coverage anymore. As a result, it may make sense to surrender the policy or to withdraw the participating cash value.

More Details:

What is a Participating Fund Singapore

This is opposed to keeping the policy for coverage that we no longer need. Instead, it makes more sense to withdraw the participating policy value to offset our living expenses.

Cost of Policy

In general, the cost of policy to you = total premium paid - surrender value.

On the whole, I will suggest for you to do a comprehensive financial planning to know your needs. This is because an early surrender may result in an inevitable loss. In order to avoid such a situation, it will be best to know your needs first.

I share quality content on estate planning and financial planning here.

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