Clearly, the other blogger is currently on holiday.
While he is enjoying himself, it will be left to me to continue
A tad lonely, I also encountered a blogger block. Then I decided that it would be apt to talk about holidays – Premium Holiday
What exactly is Premium Holiday ?
According to our Glossary, Premium Holiday refers to when one’s policy has cash value, one may use the value to offset (pay) the premium. The act of using the policy’s own cash value to offset the premiums due is called a premium holiday – the policy owner takes a holiday from paying the premium, so to speak.
When you purchase a wholelife, endowment and ILP policy from any insurer, your policy will slowly accumulate some cash value over time. This cash value will grow as you continue to pay for the premium on time.
In the event that you are unable to pay for the premium, the life policy will automatically take a Policy Loan from the cash value. That way, your life policy will not lapse due to your non-payment.
What is a Policy Loan ?
It is akin to taking a loan from the cash value of the policy. Besides premium holiday, you may also take a policy loan out of your life plan when you are in financial needs.
Consequences of a Policy Loan / Premium Holidays
Everything comes at a price.
With a policy loan, the immediate impact is that your cash value will be reduced. Due to the unfavourable interest rate, your policy value will be diminished more than the loan quantum
In addition, the long term effect is that your surrender/maturity value will be trimmed tremendously as the compounding effect will be lessened.
We opine that policy loan is not a good way to secure a loan as the interest rate is rather high. It may make more sense to relook at other sources of financial funds that levy less interest rates.
Therefore, by association, it is not financial savvy to overlook your premium payment and allow your policy to go on Premium Holidays as it will drain your maturity value in the long run.
Alternative solution may be to reduce the coverage and thus lowering your premium amount. Some policies may allow this and thus, you may check with your insurer or adviser when the need arises.
www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.