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Withdraw dividends from savings insurance
Withdrawing cash value from a savings insurance policy
Policy loans are subject to interest rates of 5.5% to 10%.
“Borrow or not? Only borrow what you can afford to repay.”
Liquidity risk should be considered when purchasing savings insurance.
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【Policy Loans 2022】Compare policy loan interest rates! What risks should you look out for?
In recent years, the pandemic has caused many Hong Kong people to face financial difficulties, forcing many members of the public to tighten their belts. To address cash-flow problems, some policyholders may wish to suspend premium payments, withdraw money from savings insurance policies, or even take out a policy loan. Are these methods viable, and what should you be aware of when proceeding?
Withdraw dividends from savings insurance
If you want to take money out of a savings insurance policy, this involves the amount of cash value and bonuses accumulated in the policy during the policy term. First, regarding withdrawing bonuses, when you took out the policy, your insurance consultant should have introduced the projected bonuses to you, such as annual bonuses. However, the actual amount of bonuses in the policy depends on the accumulation period and premium payment term.
For example, Mr Chan took out a long-term savings insurance policy more than five years ago. He is required to pay premiums for 18 years, with monthly premiums of 698 US dollars. He has paid 46,812 US dollars in premiums to date, while the accumulated bonuses amount to 1,118 US dollars. Generally speaking, withdrawing bonuses will not affect the guaranteed cash value or life protection of the policy, but it will reduce the compounding effect.
Withdrawing cash value from a savings insurance policy
Since the bonus may not be substantial, would it be feasible to withdraw the cash value from one’s own policy? In Mr Chan’s example above, the cash value available for withdrawal from his policy is US$8,705. Together with accumulated dividends of US$1,118, he could withdraw a total of US$9,823 if he surrendered the policy at this point.
However, compared with the premiums paid of US$46,812, Mr Chan would lose 79% of the premiums paid. It is worth noting that if a customer takes out a savings insurance policy together with supplementary contracts, the coverage provided under the latter (which may include medical, life or accident coverage) will also terminate when the savings insurance policy is surrendered.
Policy loans are subject to interest rates of 5.5% to 10%.
Another contingency option to consider is a policy loan. Generally speaking, after completing the initial premium payment period, customers may apply to the insurance company for a policy loan to withdraw the policy’s cash value. Unlike surrendering the policy, a policy loan allows the coverage provided by the savings insurance policy and supplementary contracts (if any) to continue.
The maximum loan amount under a policy loan is usually 80% to 90% of the policy’s accumulated cash value, depending on the product. Of course, policy loans also incur interest, generally at an annual interest rate of 5.5% to 10%.
In addition, some policyholders may wish to ease their financial burden by suspending policy premium payments. In fact, for some savings insurance policies, if customers stop paying premiums on their own initiative, a policy loan may be automatically activated, meaning that loan interest will be incurred. For other savings insurance policies, stopping premium payments may result in the termination of the policy. Therefore, the advantages and disadvantages should be carefully considered before making this decision.
| Savings insurance offered by insurance companies | Policy loan interest rate (per annum) |
| AIA | 7% (US dollar and Hong Kong dollar policies effective from 1977 onwards) |
| AXA Hong Kong and Macau | 8% |
| BOC Life BOC Life | 7.5% to 10% |
| China Life China Life | 7% |
| FT Life FT Life Insurance | 8% |
| FWDFWD Life | 6% |
| HSBC LifeHSBC Life | 7% (policies issued before 1 December 2018); 5.5% (on or after 1 December 2018) |
| Manulife Manulife | 10% |
| Prudential Prudential | 8% |
| Sun Life Financial | 8% |
| Note: Policy loan interest rate data updated to 28 April 2022; the rates published by the insurance companies shall prevail. | |
“Borrow or not? Only borrow what you can afford to repay.”
If you choose to take out a policy loan, you will of course have to pay loan interest, which the insurance company will deduct from the remaining cash value. In addition, if the policy is still within the premium payment period, you will still need to pay the premiums during the loan period. If you stop paying the premiums, the remaining cash value will be reduced further, effectively meaning that you are borrowing more money. However, if the remaining cash value and bonuses under the policy are less than the outstanding debt, the policy may also be terminated.
Taking Mr Chan’s example again, if he borrows 6,000 US dollars through a policy loan, the cash value will fall to 2,705 US dollars. The annual interest rate on the loan is 8%, meaning that the monthly interest is 40 US dollars. As he needs to pay monthly premiums of 698 US dollars, if he also stops paying the premiums, the cash value of the savings insurance policy will only last for another 4 months. If he neither repays the loan nor resumes paying the premiums, the policy will be terminated. Therefore, when deciding whether to borrow money, you must always remember: “Should you borrow? Only borrow if you can repay it.”
Liquidity risk should be considered when purchasing savings insurance.
As a final reminder, most whole life savings insurance policies are long-term products. Through sustained savings, the insurance company harnesses the effect of compounding to accumulate wealth for customers over the long term. However, the funds in a typical savings insurance policy are not highly liquid, particularly in the early years of the policy. As in the case of Mr Chan above, although the policy has an 18-year premium payment period, he had only paid premiums for just over five years, so its cash value was limited (relative to the premiums paid). If all premiums under the policy have been paid, the cash value may be higher than the premiums paid.
Therefore, when selling a policy, insurance advisers should conduct a financial needs analysis (Financial Need Analysis) for customers to ensure that they can afford the premiums throughout the premium payment period. They should also ensure that customers understand the liquidity risk.
Many people’s incomes have fallen significantly during the pandemic. However, if you are considering taking out a policy loan or surrendering your policy, you should first clarify the details with your insurance adviser. If you would like a second opinion, you can use 10Life’s “Ask Questions Anonymously” service to receive immediate responses from multiple licensed advisers.
Note: This article was last updated on 28 April 2022
This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.
10Life Editorial Team
Our team of professional content researchers focussing on insurance
10Life Editorial Team
Our team of professional content researchers focussing on insurance
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