Thu | Jul 2, 2020

Growth & Jobs | Resist the urge to cash in on insurance policies - experts

Published:Tuesday | June 9, 2020 | 12:19 AM
Tomlinson
Tomlinson

WITH THE COVID-19 pandemic affecting many persons financially, two of the country’s leading insurance executives are advising policyholders to resist the urge to cash in on the investment portion of their policies.

Orville Johnson, executive director of the Insurance Association of Jamaica, said that the insurance industry paid out $23.2 billion in claims in 2019, with $3.8 billion being disbursed for death and critical-illness benefits while the rest was paid out for living benefit.

Johnson pointed out that while it is still early to determine the full impact that COVID-19 will have on the payment of benefits, cashing in on the investment portion of policies should be a last resort.

“Over the years, a number of policyholders have used their policies to accumulate funds for the education of their children, retirement purposes, house purchases, and more recentl,y to invest in the stock market, and, of course, as an emergency fund if there is a crisis,” he said.

“The funds that are built up on a life insurance policy are usually earmarked for specific reasons, depending on one’s financial goals throughout their life cycle. Ultimately, it provides retirement income, so a policyholder should seek to preserve it as much as possible. If they find themselves in a financially difficult position, one suggestion would be to use it as collateral for a short-term loan. But using it prematurely must only occur when there is no other option,” he added.

Oliver Tomlinson, general manager, JN Life Insurance, points out that with COVID-19 forcing companies to furlough employees or reduce salaries, many persons were now experiencing severe hardships. He adds that while there is the temptation to cash in on their policies, this should viewed be as something that must be preserved for its original intent.

“Many persons are finding it difficult to make ends meet. They also have obligations to fulfil. My recommendation would be to have a conversation with your banker first to work out a suitable funding facility before you consider cashing in an insurance policy,” Tomlinson pointed out.

FINANCIAL RESILIENCE

The JN Life general manager explained that one of the purposes of the investment component is to build financial resilience. Consequently, it is important for persons to think carefully before acting.

“You should only cash in if you have absolutely no option because insurance policies are long-term savings for matters such as retirement income or real estate,” explained Tomlinson.

“In general, the longer you allow the cash value of the policy to grow, the more advantageous it is. When you purchase a policy, it is ideal to wait between five and 15 years before taking funds from that policy. People may be sceptical of this view because there is the perception that only the insurance company will benefit, but the advantages of waiting and weathering this storm will be rewarding,” he added.

Johnson points out that another option to consider is speaking to a financial adviser to get guidance before taking cash from the policy .

“The policyholder should contact their insurance adviser, who can advise them as to how they can proceed as policies have different features. Persons may ask if they can repay what was taken when their financial situation changes, but if funds were encashed, it may be wise at times to buy a new policy instead of trying to repay what was taken. However, a needs assessment is always advisable before making a decision,” he explained.

Tomlinson added that persons should also consider finding ways to reduce expenses during this period.

“I would also recommend that if you are still employed, you should consider saving even more. This could also mean purchasing a policy or making other long-term investments. For those experiencing difficulties, be as frugal as possible with your spending because we do not know how long this current economic downturn will last,” he explained.