2. What do I need to consider if I am thinking whether to replace an existing insurance policy with a new insurance policy? From whom may I seek advice?
Prior to switching your life insurance policy to another insurance company, you should be careful that your agent is not making inaccurate or misleading statements or comparisons to persuade you to switch. This is not uncommon as your agent could earn a commission from your switching to another insurance company (where the agent is also switching to a new insurance company).
Replacing an existing life insurance policy with a new insurance policy may bring certain risks and consequences which you need to consider carefully:
- Financial implications
- Life insurance policies usually last for a long period of time. If you surrender your existing life insurance policy, particularly during the early years of the policy period, you will usually suffer loss;
- The cash value that you may receive from surrendering your existing life insurance policy may be less than your total premium paid;
- You may be subject to withdrawal or surrender charges;
- In purchasing a new life insurance policy, a substantial part of the initial premium may be used to pay for policy administration and insurance intermediaries costs;
- You may have to pay higher premium under the new life insurance policy in view of the difference in age and changes of health and other conditions; and
- You may lose the financial benefit accumulated over the years (e.g. loyalty bonus or dividends) under the existing life insurance policy.
- Insurability implications:
- If you purchase a new life insurance policy to replace an existing life insurance policy, some benefits, which are the policy features of the existing life insurance policy, may not be covered under the new life insurance policy due to changes in age, health conditions and occupation, etc.; and
- Riders / supplementary benefits under your existing life insurance policy may not be available under the new life insurance policy.
- Claims eligibility implications:
- Benefits under the existing life insurance policy will no longer be payable to you if you surrender the policy or allow it to lapse; and
- You may need to start a new waiting period in respect of certain benefits (e.g. medical, critical illness, suicide or incontestability) under the terms and conditions of the new life insurance policy.
In Hong Kong, to protect life insurance policy holders’ interest, subject to some exceptions, licensed insurance intermediaries are generally required to advise customers who are considering to replace an existing life insurance policy with a new policy whether the arrangement is in their best interests taking account of any reduction in the total cash value or sum insured under the existing policy, and any other adverse consequences.
In order to protect consumers against the above risks, there is a requirement for them to complete the Important Facts Statement - Policy Replacement (the "IFS-PR", which can be found as Appendix B in the Guideline on Long Term Insurance Policy Replacement issued by the Insurance Authority). Where there is a switching or replacement of a policy, the insurance agent must declare on the IFS-PR that he/she has fully explained the risks that would be involved to the client. The client must also declare that he/she understands the risks concerned.
In summary, make sure that your insurance agent is not making inaccurate or misleading statements or comparisons to persuade you to switch. Any additional genuine and legitimate benefit available under the new policy may make it worth switching, but you must be clear of the potential risks and what could be done to manage these risks.