Sunday, November 22, 2015

Encash the participating bonus

Dear Mr Tan,
Thank you very much for your constant contribution to the insurance community.  Certainly, your perspective on a lot of the issues discussed provided many with good guidance on how one should approach insurance.

I noticed there is one topic that is seldom discussed and that is the idea of encashing one’s participating policy’s declared bonuses.  I was recently introduced to the idea and after a lot of thinking through, realised that this option provides a policy holder the ability to enjoy the benefit of a ‘partial claim’ without the need to fulfil a claim condition.  I am also unable to find a downside to this approach except for the possibility that the final terminal bonus may be adversely affected.  However, as terminal bonus are never guaranteed,  there is really no way one can verify that.

I would like to seek your insight and wisdom as to what you think are the possible downside of such an approach as compared to initiating a partial surrender, APL or terminating a policy in order to managed one’s obligation to pay the policy premium.  The way I see it, using this bonus encashment method would mean that one could continue to keep his whole life policy alive as it become self-funding as long as the bonus declared are sufficient to cover the premiums.  This is possible when a policy has been held for 20 plus years and has grown substantially in terms of its bonus.

Appreciate if you could enlighten me if my views above are in error.  If my above analyses is correct, then effectively, all participating policies (when the insurance company is honourable enough to declare fair bonus like those declared in the 1990s by NTUC)  would become self-funding after some time and that is a good basis for one to keep their participating insurance policies for lifetime cover.

When you encash your bonus, the insurance company pays you a discounted value. For example, if your bonus is $5,000 and the maturity date is 10 years away, and the discount rate is 5% p.a., you will get only $3,069. You have to decide if it is better to get $3,069 in cash now, or wait and get $5,000 in 10 years time. 

If you encash your bonus, it may reduce your terminal bonus on the maturity date, as the terminal bonus may be calculated on your accumulated bonus. It will not affect your terminal bonus, if it is calculated on the face value of the policy. It depends on the practice of each company. It also depends on the type of policy that you have taken, as the practice may differ with different policies of the same company.

The answer to your question is that it depends on the terms that you are offered for encashing your bonus. It is not possible to rely on a general statement.

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