Cashing in Long Term Insurance Policies

Consider your options carefully Insurance industry experts warn consumers that surrendering your policy for some cash might not be the best option.

Anybody looking to finance a long term project in the South African market today, such as buying a house or opening a new business, will probably face a brick wall when they turn to traditional lending institutions, such as banks. With the implementation of the National Credit Act, banks are stricter than ever about who they fund, and many South Africans are simply left with no alternative but to find other sources of income.

One possible option available to these people is to cash in a long term insurance policy and use the investment fund. As tempting as this move may be, however, financial analysts warn that this may not always be the smartest move.

If your life insurance policy has a investment component, that fund will certainly increase over time, so that the longer you have been paying your monthly dues, the larger this fund will be. The idea is that at some point, that component will eventually start paying your life insurance coverage as well. However, if you withdraw the surrender value of the life insurance policy, you are significantly reducing the cover amount of the insurance itself.

This is what experts warn us about. They say that it becomes literally impossible to build up the life cover of the long term insurance to the level that it was before should you withdraw the investment funds. As a result, life cover becomes very expensive and you should seriously ask yourself if you will be able to afford to pay for full coverage that protects your family.

Analysts say that you should seriously weigh the risks when considering the possibility of cashing in on a life insurance policy. People should take into account the scenario that should they die while the business is still in its nappy stages, and it cannot develop without the policyholder, their family may not have sufficient life insurance cover because the funds had been ploughed into opening the business in the first place.

It is thus suggested that you consult with your insurance broker to get all the facts and seek out alternatives before making such a drastic move.