With inflation and interest rates on the rise and stock markets tumbling, many consumers are feeling the pinch of higher debt repayments.
Consumers are resorting to desperate measures to curb their spending.
Unfortunately disillusioned consumers sometimes turn to their long-term savings policies for relief, wanting to access the accumulated lump sum as well as saving on monthly premiums.
Lerato Mametse, deputy executive of the Life Offices’ Association, says its financial advisers caution against the surrender of a savings policy.
But desperate consumers sometimes bypass their advisers and simply cash in their policies without fully understanding the implications or realising that there are other options.
Mametse says that while it is not possible to give blanket advice on whether it would be in your interest to surrender your policy or not,
it is important to consider that this is usually not in your long-term financial interest.
“Get all the facts before surrendering your policy. Make sure you know what the investment value of your policy is and decide whether it is worth surrendering your policy at a lower value.
“Also look at benefits such as guarantees and life and disability cover. Consider whether the underlying investment portfolio is appropriate given your needs and risk profile.
“It is in your best interest to remain invested until your contract reaches maturity as this allows the life insurance company to recover charges related to the policy over the full term of the policy.
“You will benefit from the compound growth and from being invested in the market for a longer period of time.”
Consider the following before making a decision: I am in debt and can no longer afford my premiums.
Surrendering your policy should be a final resort. If you need cash urgently to tide you over for a short while, but are serious about preserving the value of your policy, you have other options:
1. You can give up your policy to your bank in return for a loan.
2. You can request a loan against your policy. Such a loan may be interest-bearing or interest free depending on your policy.
3. You can partially surrender your policy, which means you withdraw only a portion of the value. The remaining amount then continues to grow with future premiums paid.
4. You can make your policy paid-up, which means you stop paying your premiums, but do not access the fund value.
Depending on the policy rules, you may be able to reinstate your policy at a later stage if you repay the arrear premiums.
But, if you stop paying your premiums before the fund value exceeds the unrecouped costs on the policy – your policy will lapse and you will get nothing out.
5. You can sell your policy on the second-hand market. But you generally need a price substantially higher than the surrender value before such a deal even begins to make sense.
Brought to you by the Life Offices’ Association, a trade association for South Africa’s long-term insurance industry. For more information go to www.loa.co.za