Q. I have had an old Whole-of-life insurance plans with AMP for 42 years and I am considering cashing the policy in as I don’t need the insurance anymore. There is a big difference between the cash value of the policy and the insurance value. Am I doing the right thing or are there other alternatives. I am 68.
A. Whole of Life insurance is a combined investment and insurance plan that was offered in the Australian market since the 19th century. Considered inflexible and expensive, their popularity declined in the 1980s as Life Insurance companies developed Insurance and investment /savings products that were “unbundled” from each other. These types of policies have not been offered since the late 1990’s for new business.
A Whole of Life policy comprises the basic Sum Insured, the Annual Bonuses and the “Terminal Bonuses”. The Basic Sum insured was the insured value when the policy commenced. The bonuses are the compounded return on the Basic Sum Insured between then and now. Whole of Life Insurance policies pay out the combined value of these 3 components on death or on the insured person reaching age 95. If you cash the policy in prior to age 95, you only receive a proportion of this value.
There are alternatives to cashing in or surrendering the policy. If you don’t need the money now, policies can be converted to mature with a minimum of 5 years notice. Policies with a fixed maturity date prior to age 95 are referred to as Endowment policies. Endowment policies can be converted preserving the full benefits on death or maturity as opposed to the cash value now. In most cases, the proceeds of Whole of Life or Endowment insurance policies will be tax free when cashed in or matured.
Alternatively you can sell your policy in the secondary market. The Capital Guaranteed nature of these policies make them attractive investments for those looking for fixed interest returns. Australian Policy Traders has been buying and selling policies since 1999. www.austpolicytraders.com.au They will pay you up to 5% more than the surrender value of AMP, AXA or MLC Insurance policies.
Other options for these policies include cashing in a proportion of bonuses or borrowing against the surrender value. Many people retain Whole of Life policies for Estate Planning purposes. The fixed annual premium for the insurance makes the cover inexpensive compared to Term Life insurance and provides a lump sum for beneficiaries on death.
If seeking advice, make sure your adviser understands how these policies work and how to optimise their benefits.
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The above Q&A was originally published in The Australian