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Tips for young people - should they continue their existing life insurance policy?
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I have often received an email from a young person who bought a life insurance policy recently and now have second thoughts about the policy. They asked me for my view on whether they should terminate the policy.

I find it difficult to answer this question.

If they cannot afford to continue the premium payment, they have to terminate the policy. They have no choice. They could get money from their parents to continue the policy, but it would be a difficult decision. The parent may find it a burden to pay the premium.

If they can still afford to continue the premium payment, they still have to decide on whether it is worth while to continue the policy. They have to look at the benefit illustration for the policy and see what is the cash value of the policy at various durations.

Quite often, the projected cash values are discouraging.

Take this hypothetical case. The policyholder had paid premium for one year amount to (say) $1,800. The cash value is (say) $200. So, they would have lost $1,600 my terminating the policy now.

What would the value be after another year. They would have paid an additional $1,800. If the cash value at that time is say $1,500, their lows would be $2,100 (i.e. $3,600 - $1,500). Their loss would be greater by continuing the policy

What is the case, if they continue the policy for the 3rd, 4th and 5th year?

It would be very sad if the loss continue to increase each year for the first 5 or 10 years. At some point of time in the future, the increase in cash value would be higher than the premium paid for that year. This would be a turnaround. But, it is break-even for that year. The accumulated loss at that time could be very high.

The life insurance policy has a positive feature. It provides protection in case of premature death. The payout would be much higher than the premium paid. 

However, the chance for premature death is very small for young people. If they need protection, they can buy a term insurance policy or an accident policy at a very small premium. They do not need to suffer a large loss of several thousand dollars on the policy that they have bought.

I have often been asked, "I bought policy X for 1 year. Should I continue or terminate the policy?"

This information is inadequate for me to give opinion. I need to see the benefit illustration. You can ask the insurance company to provide this benefit illustration. You can also check the documents given to you at the point of sale, as the agent has to provide it to you.

The agent should have explained the benefit illustration to you, but many agents just skim over this responsibility. Quite often, the customer is not aware about the terms of the policy.

When I see the benefit illustration, I would be able to show you at the point of the turnaround and the accumulated loss at that time. In most cases, it is clear that the policyholder would be better off by terminating the policy earlier.

Many young people are not aware of this little known secret. it is easy for them to invest their savings in a different way that will give them an attractive return over the long term. The return could be double of what they can get from a life insurance policy.

To learn this secret, you can join the Financial Services Consumer Association.  Click here to find out more details.