One Insurance Too Many?

In the insurance industry, it is a big no-no for an insurance agent to tell prospects or clients to sell off their existing policies and buy a new one from them to generate sales for the agent when it is unnecessary to do so.

There is a term for it, called “twisting”, defined as “the act of inducing or attempt to induce a policy owner to drop an existing life insurance policy and to take another policy that is substantially the same kind by using misrepresentations or incomplete comparisons of the advantages and disadvantages of the two policies” so it is of no surprise that such practise is frowned upon by insurance industries worldwide.

Here are some ways it can be done:

•  Surrendering or lapsing your existing policy and using the premium moneys to buy a new policy
• Converting an existing policy to reduced paid-up insurance with a lower sum assured
• Converting an existing policy to an extended term which reduces your premium payments for the existing policy

The drawbacks from unnecessary changing of policies are:

• Costly conversion due to the increase of premium as you get older
• The new policy will have a new waiting period, thus beginning another two-year period of contestability
• Loss of specific features in your policy due to health and age
• Surrender value from cancelling your existing policy will be much lower than the total premiums you have paid

If you already have a cash value life policy, be wary of unprofessional agents who would persuade you to surrender or convert your policy. This is because insurance agents receive the highest commissions from the premiums paid by you in the first year. Professional agents will always place your interest first before theirs.

However, in my experience working with my clients, it is quite common for many people to have numerous insurance policies and sometimes for the wrong reasons. Also after some time, clients have forgotten what their policies cover and they don’t know what to do. Here are some common reasons why someone may have more than one policy:

Obligatory policies 

Taken under obligation,  as a relative, spouse or a close friend is an insurance agent who has not met their annual targets and you are duty-bound to help them out.

Orphaned policies 

The agent who sold you the policy isn’t interested in servicing you anymore because your policy is more than six years old and they don’t get anymore commission out of it, he has quit this business, moved to another insurance company or have terminated by the insurance company.

Mis-sold policy

Some official from your bank or an insurance company approaches you, presents a very attractive picture of a plan which you bought into, but later realize that the returns and the features are not quite what was told to you and there are other pertinent facts in the fine prints that you are unaware of or may not be agreeable to.

Lapsed policy

This is a policy which either your parents took for you when you were studying or you took it a long time ago, have lost track of it, and have forgotten to pay the premiums.

So, what can you do with a multitude of policies for which you can’t fathom out? Well, for one thing, you can sit down and go through each of them with your respective agents, or find an agent who can help sort them out.  You may need to pay a fee.

Alternatively, you can do-it-yourself, for which if you do, then you will find the following tips useful.

Then, you need to decide:

1. why do you need insurance in the first place and
2. how much insurance coverage do you need
3. types of insurance suitable for you

Write them down so that you can refer to all these when you go through your policies to match them to your needs.

Next list down all your policies and break them down to each area of coverage it gives you and how much. If you are not sure, you can always call up the insurance company or the agent serving you.

When you have done that, match what you have with what you need and that would give you a clearer picture of whether what you have is sufficient, not enough, or too much. Obviously, if it is enough, you do not need to do anything.

If it is not enough, do your homework and know the pros and cons before buying another insurance policy for yourself or your family member.

Consider family packages if there is one, especially for medical plans and you may enjoy savings in premiums. Remember to check out the plan and compare it with having individual medical policies.

Should you be over-insured you can consider converting it to something you need. This, you will need to discuss with your insurance agent. Should yours be an orphaned policy your options are; to deal directly with the insurance company, get the insurance company to assign another agent to you, or work with a financial planner and authorize him/her to act on your behalf when dealing with the insurance company.

Do remember that if you feel that it is beneficial to convert your policy, always write to the insurance company stating the purpose of the conversion and that the conversion is not detrimental to you.

This will also clear up any doubts of “twisting of policies”. Leave the twisting to the floor with “Let’s Do The Twist” by Chubby Checker (1960).

Written by: Linnet Lee, CFP, IFP, of Linvest Services Sdn Bhd & CEO of FPAM

Read more: How Our Human Intuition Undermines Our Financial Well-Being