Definitely Definitive

As promised in my earlier post, here's an informative post on an even Wednesday!

There is a Invest segment in the Sunday edition of my local paper (The Straits Times) and recently they added a new column to decipher financial jargons which is very much the essence of what we do here at Sense & Cents.

Last Sunday, the subject jargon was 'Reversionary Bonus' (RB). As defined very clearly by Lorna Tan, RB is part of Life Insurance Policies and it is a bonus that insurers pay out every year to increase the cash value of your policy. Such bonuses are subject to the investment returns of insurers.

However some details were left out and I will elaborate more on RBs.

1) Not ALL life insurance policies come with RBs, you should confirm this with your financial services consultant or call your insurers directly to be sure.

2) Most life insurance policies come with a lock-in period (usually 20 years) and should you surrender the policy before the lock-in period, early termination charges apply and your RBs will be deducted accordingly as well.

3) RBs are accumulated over and above your premiums paid so you are actually able to cash out your RBs without surrendering your life insurance policy. However there is a catch here.....

The Catch: Should you wish you cash out your RBs during the lock-in period without surrendering your policy, you will only get a fraction amount and stand to lose most of the accumulated RBs.

Example: I have a life insurance policy that insures my life for $25,000. I have been paying the premiums for 15 years. The accumulated RB over these 15 years over and above the cash value of the policy is $3800. Feeling extremely excited and thinking that I just got a windfall, I call up my financial services consultant to cash out my RB while retaining my life policy. However since I have not passed the lock-in period, I am only able to cash out $500.

So what happens to the remaining $3300? Sadly, there is no happy ending and the remaining $3300 is forfeited as an 'early cash-out charge'. Therefore it definitely does not pay to cash out your RBs during the lock-in period. However once you pass the 20-year mark, you are free to cash it out fully.

What then is the use of having this partial cash-out function? Well, it offers the flexibility of getting some cash while retaining your coverage. If you happen to be one of those people who have policies that have been in force for more than 20 years and feel tempted to surrender the policy but you still need the coverage (your kids are still young, your parents need your income, your spouse is not working etc.), then you should consider cashing out your RB to provide better cash flow.

I have brought you through some pretty dry stuff but I hope you learnt something new about
your insurance policies, look out for next Wednesday's reflective post! I will do my inaugural book review.