It’s not about lying on the beaches of Maldives or taking a sip of Pinna Colada off the swankiest rooftop bars of Las Vegas. It’s about something more serious and that is premium holidays relating to your insurance premiums.
What is a Premium Holiday?
A premium holiday is when one uses their policy cash value to offset payment for their premiums and the act of doing so is like taking a holiday from paying any premiums, hence it’s name.
When a consumer starts paying their premiums for an endowment, Investment Linked Policy or Wholelife Policy, the policy will accumulate cash value over time and it will continue to grow provided that you continue paying your premiums.
How does Premium Holiday work?
In the event if you are not able to pay for your premiums, the life policy will dig into those cash values you accumulated over time and take a policy loan out of it to pay for the premiums so that the life policy will not lapse. Apart from Premium Holiday, you can also take a policy loan out of your life plan if you require the cash.
What’s the downside of taking a Policy Loan or Premium Holiday?
By taking a policy loan, it would mean that your cash value would be reduced immediately. Also with very discouraging interest rates, your policy’s cash value will be reduced even more.
The long-term effect would be that the maturity value of the plan would be reduced greatly and what you could have taken out upon maturity would have been greater as the compounding effect could have been more if no policy loan was taken.
As a conclusion, a policy loan is best not taken, as interest rates can be very high and unfavourable. However, if a loan has to be taken, it would be wiser to find other sources of financial funding which has a lower interest rate.
So remember to keep paying your premiums continuously as overlooking your premium payments and allowing your policy to go on premium holiday mode can result in a drastically reduced maturity value in the long term.
Otherwise, an alternative solution is to go with what you can afford and reduce coverage and lowering the premium amount if the need arises. However, you would still have to check with your insurer if this can be done.