I bought a whole life policy about 20 years ago that requires premiums to be paid till age 85. Should I switch to a term or limited pay whole life policy to reduce financial burden in old age? - Seedly
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Anonymous

Asked on 16 Jun 2020

I bought a whole life policy about 20 years ago that requires premiums to be paid till age 85. Should I switch to a term or limited pay whole life policy to reduce financial burden in old age?

The surrender value is nett positive after factoring in the total premiums paid. I am aged 42 and a homemaker. I'm considering if I should surrender my existing policy to switch to either 1) term policy with critical illness rider or 2) limited pay whole life policy with critical illness rider.

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Hi anon,

If your policy requires payment till age 85, you will need to figure out if there is a way for you to sustain the premiums till that age. I'm guessing that this policy has critical illness coverage, in which case it is a good idea to keep the policy, as the liquidity provided by the payout in the event of critical illness will come in useful no matter when it occurs. Furthermore, premiums should be quite low, so it is very likely that retirement income stream planning can help ensure that you will be able to afford the premiums in old age. Although you are a homemaker, but if you have savings from previous jobs, or are receiving an allowance from your spouse, it is possible to create an income stream for yourself (but that's another topic entirely)

As your policy has been in force for 20 years, it has accumulated a fair bit of cash value. Since this cash value compounds, we need to weigh these numbers against the numbers of a new limited pay whole life policy. If surrendering the old policy and taking a new one puts you at a disadvantage numbers wise, then it will be hard to justify. This really depends on the figures for your individual policy.

Additionally, another aspect which needs to be considered is your insurability. If you are in good health, then there is no issue, but if you have any existing conditions now, you might get exclusions if you decide to switch, and it would be better to stick with the old policy.

Without having any numbers to reference, it is a little hard to say if it will be better to switch or keep your existing policy. You might want to speak to an independent financial advisor to evaluate your options first.

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Question Poster

17 Jun 2020

Thank you for highlighting the considerations, it is helpful.
Thank You!
Can you clarify
I wonder if
This is so helpful 👍
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Sk Tan
Sk Tan
Level 3. Wonderkid
Updated on 20 Jun 2020

I also own whole life (WL) policies with premium terms to 85. U have to understand how your policy work. My WL now provides me with 4-5% compounded returns (longer than yours) and I still continue to pay premiums with the good returns, tho I dun need the insurance coverage anymore. I have the following choices:

  1. Convert it to paid up, ie stop paying premiums but still enjoy same insurance coverage.

  2. Convert it into an annuity plan, ie stop paying premiums but get regular payouts from it.

  3. Surrender and cashout, ie terminate.

I do not want to do any of the above cos the returns will be lower.

So I suggest u talk to your insurer/agent what options are available for your policy. It is not worth to convert or switch to term insurance (your premiums down the drain if nothing happens).​​​

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Question Poster

25 Jun 2020

Thank you for sharing your perspective, much appreciated
Thank You!
Can you clarify
I wonder if
This is so helpful 👍
What about
Post

Is the primary purpose for your whole life plan for death or critical illness coverage?

For death: For most people, their liabilities taper down and end close to retirement. You may want to consider a term plan for more bang for your buck death coverage. However this may change if your primary concern is leaving behind a bequest for the next generation.

For Critical Illness: If you initial purpose of getting a whole life plan was to ensure that you have substianal coverage for whole of life, I think getting a term plan till retirement age defeats your initial purpose.

A limited pay whole life policy may allow you to reduce financial burden in old age if that is your primary concern. However please ensure the following:

Your health allows you to switch to a new policy.

Your current cashflow allows you to switch to a plan with potentially higher premium.

You are able to continue servicing this premium consistently.​​​

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Question Poster

17 Jun 2020

Thank you for your advice
Thank You!
Can you clarify
I wonder if
This is so helpful 👍
What about
Post

Perhaps you could request for a reduced paid up cover;

no longer pay any premiums and keep your coverage and cash value to accumulate further for later years. Terminating your 20 year policy to receive the cash value and rebuying into another plan may not be ideal.

Instead of channelling the cash value from surrendering your existing policy into another policy, you could stop paying for the current whole life and keep the coverage. Use the premium you had been using to top up the shortfall (if any) for coverage and invest the rest for retirement (split the premiums into insurance and savings/ investments)

Rebuying a new policy will incur much higher premiums due to a later age of entry so it wouldn't really be ideal. Most insurers would have a reduced paid up option.

https://www.valuepenguin.com/reduced-paid-up-life-insurance

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Question Poster

17 Jun 2020

Thank you for your suggestion, it is helpful.
Thank You!
Can you clarify
I wonder if
This is so helpful 👍
What about
Post

Given the fact that you bought the insurance policy 20 years ago, there will definitely be a huge difference between the dollar for coverage then and now. Therefore, I will suggest for you to have a detailed understanding on your existing policy first.

Through this process, it allows us to have a proper understanding of that policy. This is in contrast to switching to another policy, e.g. term.

Next, we will perform a calculation to determine the total premium outlay and benefits for each option. Once this is completed, it should be clear on how you can make the reight decision.

When in need, speak with your agent or an experienced consultant to go through the details with you.

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

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Question Poster

17 Jun 2020

Thank you for your advice.
Thank You!
Can you clarify
I wonder if
This is so helpful 👍
What about
Post