Twisting of existing life insurance policies

Dear Mr Tan, 

I read your blog (http://tankinlian.blogspot.com/2010/02/switching-to-limited-payment-whole-life.html) with much interest. Two days ago, an insurance agent was trying to convince me to take on a new limited (20 yrs) whole life insurance for $200k coverage, and to terminate my existing 2 life policies (which are the normal type payable till 60 yrs old) which covers me for about $150k in total. 

I listened to the agent's explanation how the new policy is more economically beneficial. In summary, the total premium i have to pay under this new policy is $25k less, yet the coverage is $50k more than what I have for my 2 existing policies added up together. Also the guaranteed surrender value of the new policy at e.g. age of 65 yrs is $20k more than my 2 existing policies added up, which means this new policy break even much earlier than my existing policies. Prima facie, the economic analysis seems to make alot of sense to switch to this new policy. 

However, to terminate my 2 existing policies, i will lose $6k in total because both are less than 5 years. It is a dilemma now, whether to take the short term hit losing $6k vs the longer term benefit which are in tens of thousands. 

I hence spoke to a friend who was an ex insurance agent for an independent advice. This is what he told me:

1) When I terminate policies, some items will lose coverage for a period eg cancer which kicks in only a few months after a new policy is bought. So I will have an 'exposure' period.

2) Insurance products are always improving, so I am never gonna be getting the best

3) Returns from insurance policies are just nominal, so the returns doesnt matter that much. I should focus my attention on seeking returns from investments, rather than 'optimising' the returns from my insurance policy.

I hope to seek your expert advice on this topic, whether switching to the new product is indeed beneficial for me. 

REPLY

You can send the benefit illustration for the three policies to me. 

Generally, it is bad idea to terminate an existing policy to take up a new policy, as you will be incurring the upfront cost (1 to 2 years of your premium) all over again. When an agent advise you to take up a new policy to replace an existing policy, the agent is "twisting" the policy. This is almost always at the expense of the consumer. Some agents can make a good living by adopting this type of predatory practice. It is easy to mislead the consumer by pointing out some half truths. It is considered to be illegal in some countries, but not the case in Singapore, due to our lax regulations.