Advice on policy loan

[Fishdim]

Hi,
I have a PruLife with Profits policy bought 1996. I had taken up policy loan on various occasions.

Details of the policy:
Age: 51
Sum Assured: 75k
Policy Term: life
Gross Surrender Value: 61k (of which 30k is guaranteed)
Policy Loan: 49k
Net Surrender Value: 12k

I am thinking of taking up a personal loan of 20k to pay up partly, is it advisable?
Or should I surrender the policy? But this is the only policy I have (other than the usual CPF / Medisave) and I have to consider in case I need the coverage for illness / death. I have 2 dependents.

What other options should I consider?
.
Thank you and appreciate all your advises.

 

[BBCWatcher]

I have a PruLife with Profits policy bought 1996. I had taken up policy loan on various occasions.
Details of the policy:
Age: 51
Sum Assured: 75k
Policy Term: life
Gross Surrender Value: 61k (of which 30k is guaranteed)
Policy Loan: 49k
Net Surrender Value: 12k
I am thinking of taking up a personal loan of 20k to pay up partly, is it advisable?

Absolutely not! The lowest cost personal loan I can find is CIMB's at a minimum 6.40% EIR per annum. That's rather expensive money.

Or should I surrender the policy? But this is the only policy I have (other than the usual CPF / Medisave) and I have to consider in case I need the coverage for illness / death. I have 2 dependents.

Do you have any more details from the latest benefit illustration? And what's the effective interest rate on that loan component? What premium are you paying (if any)?

What other options should I consider?

According to Comparefirst.sg, a male nonsmoker age 52 (next birthday) can purchase life insurance with a term to age 65 and a sum assured of S$100,000 (quite a bit higher sum assured than you have now) for a guaranteed level premium of S$240 per year (Tokio Marine)....

....And do you have Disability Income Insurance (DII)?

 

[Mecisteus]

How old are your dependents?

1 is spouse not working?

 

[Fishdim]

Hi,
Son 19yrs, gal 14yrs. Hub was forced to voluntary resign in March due to the COVID situation affecting company.

 

[Fishdim]

Hi,

Latest benefit illustration:

Age: 52
Premiums: 37584
Outstanding loan: 50687
Net Death benefit: 115137
Net surrender value: 12506

Age: 53
Premiums: 39150
Outstanding loan: 53602
Net Death benefit: 117619
Net surrender value: 14574

Age: 54
Premiums: 40716
Outstanding loan: 56684
Net Death benefit: 120100
Net surrender value: 16739


My intention is to reduce my debt, so thinking of surrendering and not have to worry about repaying the loan, also to use the $ to pay up my other personal loans.


Don't have Disability Income Insurance.

 

[Mecisteus]

Hi,
Son 19yrs, gal 14yrs. Hub was forced to voluntary resign in March due to the COVID situation affecting company.

You just need a term life insurance for let's say 10 years.

Your eldest son is already independent in a few years time.

Cut down on the loan.

 

[SBC]

Is this loan charged with 6% interest?

 

[BBCWatcher]

Is this loan charged with 6% interest?

It looks like about 5.75% interest p.a. if it’s interest only....

....OK, I think it’s safe to say surrender is looking pretty good. You have what appears to be a rather expensive loan (minimum 5.75% p.a.) running along there, and trading one expensive loan for another makes absolutely no sense to me. I would seriously consider getting insurance necessities in place first (term life/TPD, DII, and basic Integrated Shield coverage if you don’t already have that), then surrender this policy just before the next premium is due, then save and prudently invest the net proceeds (unless you have any other high cost debt you want to tell us about). The loan might have made sense if you had a short-term urgent liquidity problem to solve, then paid it back within a few months or a year, but now it’s just misery, really. Effectively you’ve already partially surrendered the policy and have been paying extra to do it.

So yes, I’d be looking at cutting your losses and getting onto a better footing.

 

[BBCWatcher]

You just need a term life insurance for let's say 10 years.

Term life insurance to age 65 is just about perfect here, really (about 12 years to run, which takes the youngest child past her 26th birthday), and probably the single most competitive insurance product. That’s also the common terminal age for Disability Income Insurance and the minimum CPF LIFE payout starting age. It’s possible to stop paying premiums and end coverage before the term age.

If you want to get slightly fancy you could buy a 5 year term life policy and a separate policy to age 65. The first policy covers your death/TPD until after your eldest child’s 24th birthday (roughly/typically university graduation) and the second until your youngest is past her 26th. That combination costs a little less than one bigger policy running to age 65, and the logic is that as each child “ages out,” and as you earn and save more, your need for life insurance ratchets down.

 

[Fishdim]

Sorry, missed that info out in my earlier reply. Yes, the loan interest is at 5.75%/annum.

I still have a personal loan replaying at $560/mth with 19 more mths to go, plus around 5k of balance transfer at 0% interest till Jul 2020 and I still need to top up Medisave as I was a self-employed till I got a FT job in 2018.

I think my situation is bad. I do have basic Integrated Shield with AIA.

 

[BBCWatcher]

Sorry, missed that info out in my earlier reply. Yes, the loan interest is at 5.75%/annum.

OK.

I still have a personal loan replaying at $560/mth with 19 more mths to go, plus around 5k of balance transfer at 0% interest till Jul 2020 and I still need to top up Medisave as I was a self-employed till I got a FT job in 2018.

OK, so it’d be wise to pay this credit card debt off in full on the due date (or one business day before the due date) in July so that you don’t start clocking horrible credit card interest. So get that $5K ready. Yes, keep paying off that personal loan on schedule which must be costing you at least 6%. (I assume if you try to pay it off faster you’ll be whacked with a prepayment penalty.) Yes, get your MediSave contribution done. That’s your money, and your 4% (possibly 5%) of interest you can collect.

I think my situation is bad.

You can get on a stronger footing. You’d just get your insurance necessities covered (term life/TPD and DII) then surrender this policy to stop its 5.75%/year loan bleeding, use a relatively small portion of the proceeds to resolve your remaining outstanding high cost debts (not your mortgage, presumably), then finally save and prudently invest the rest. The other basic choice is to find ~$50+K to pay off this 5.75%/year loan embedded within the policy, but since you don’t have that sum (borrowing at 6.4+% to pay down a 5.75%/year loan is really, really not smart) it makes sense to kill the policy. It could make sense to pull the plug regardless, but the loan part kills it well.

You can ask to see if anybody wants to make a better surrender offer than the insurance company is offering. Sometimes you’ll get a better independent offer.

I do have basic Integrated Shield with AIA.

Which one?

 

[Fishdim]

Thank you all of you guys for the advises. I have a clearer idea of what to do now going forward with the suggestions.

@BBC,
I've gotten the AIA HealthShield Gold Max B (I think no rider), downgraded from Max A in 2018 as I was afraid that my Medisave will not last long with the high premium.

 

[BBCWatcher]

I've gotten the AIA HealthShield Gold Max B (I think no rider), downgraded from Max A in 2018 as I was afraid that my Medisave will not last long with the high premium.

OK. Take a look at whether you have the rider (Max VitalHealth B). I think there's a reasonable argument in favor of the rider, if you don't have preexisting conditions yet that'd be excluded. You very well might be able to afford the rider with a restructuring of your current arrangement and still save and prudently invest a good amount.

 

[Mecisteus]

Recommended to get the rider. It's a few hundreds only per annum.

If ever you decide to surrender your life insurance, please sign up a term insurance first then surrender.

Don't do the other way.

 

[Fishdim]

Yup, checking up on the rider and term insurance now

 

[skyfpdotcom]

Hi,
I have a PruLife with Profits policy bought 1996. I had taken up policy loan on various occasions.

Details of the policy:
Age: 51
Sum Assured: 75k
Policy Term: life
Gross Surrender Value: 61k (of which 30k is guaranteed)
Policy Loan: 49k
Net Surrender Value: 12k

I am thinking of taking up a personal loan of 20k to pay up partly, is it advisable?
Or should I surrender the policy? But this is the only policy I have (other than the usual CPF / Medisave) and I have to consider in case I need the coverage for illness / death. I have 2 dependents.

What other options should I consider?
.
Thank you and appreciate all your advises.

I think your policy cash value should be able to sustain the policy for another 7-8 years assuming no growth in cash value?

If you only need the coverage for the next few years and do not want to continue servicing the premium, probably can decide another few years later.

If you require coverage for till 60, 65 or 70, probably surrendering and get a low cost term is a good idea.

 

[BBCWatcher]

I think your policy cash value should be able to sustain the policy for another 7-8 years assuming no growth in cash value?

Maybe, but there's a S$50K+ loan clocking 5.75%/year interest embedded in that policy now. And that part alone solidly kills the deal. (Which isn't a great deal anyway.) A 5.75% loan is pretty expensive these days, and it's a really good idea to stop that bleeding promptly.

I'm not criticizing Fishdim for taking that loan. If there was a genuine, temporary cash flow problem that required a few months or even perhaps a year of a personal loan, then 5.75%/year interest could have been the lowest cost choice then available and might have been a reasonable thing to do. But not any more.

 

[Mecisteus]

Some credit cards balance transfers are giving 0% pa loan for 6 months.

1-2% pa rates are also common for 6 months.

 

[BBCWatcher]

Some credit cards balance transfers are giving 0% pa loan for 6 months.
1-2% pa rates are also common for 6 months.

Fishdim is currently in the middle of such a balance transfer offer that ends in July. Fishdim mentioned that detail in an earlier post in this thread.

 

[skyfpdotcom]

No doubt. I agree 5.75% loan interest is not low.
If coverage needed yet facing cash flow issues, may be can keep. Really need to evaluate against option of term, and needs.
Surrendering would be good if the coverage is no longer required.