While you are riding the roller-coaster of life it is not always possible to keep your financial commitments on track. One symptom of this is the estimated R5-billion worth of insurance policies that lapse in South Africa every year. Most individuals cite financial difficulties as the reason for cancelling. Then many of them are surprised and even angry when they see how much (or rather how little) money they get out of a cancelled policy.

Before I explain what happens when you cancel a life insurance policy, it is important to know that there are two main types. One with a fixed term and the other is for life. Both policies can have investment portions attached to them. However, a life policy with no investment premium is the most efficient type of cover because it is inexpensive and in keeping with the trend to separate risk from investment. A term policy has a fixed term (usually 20 years) determined by you. Usually it runs to coincide with an event, such as the completion of your bond repayments or when you retire.

If you cannot pay the monthly premiums on a policy that has no investment portion the policy simply lapses when you stop paying. The insurance company will inform your broker who will usually give you a call to see why you are not paying your premiums. This will be followed up with a letter.

In the event that your life policy has a cash value, an insurance company will often use the available money to continue funding your monthly premium. Once that has been exhausted, they will again try to debit your bank account. If your policy falls three months in arrears they?ll cancel it. During this period they obviously make a concerted effort to get you back on track.

If you cancel the policy early you are liable for the costs of the entire term. These costs are taken out of the investment portion that has accrued to you. This is why you get very little, if anything, back in the first two years of the policy if you cancel.

So, for example, Mike has been paying his whole life (with a 20-year term) policy for five years, and the investment portion accrued is now worth R42,000. The policy has 15 years to go. After going through some financial difficulty, he decides that he no longer wants to pay the premium and cancels the policy. As a result of cancelling before the maturity date he is liable for the ?unearned? costs over the remaining 15 years. His actual payout will be around R36,000 as a penalty of R6,500 will be deducted. Every company has a different way of handling cancellations so the above are ball park figures.

The best way to prevent this kind of thing is to make sure that your investments and risk cover are kept separate. The benefits are twofold, firstly, if you cancel your life policy for any reason there is no financial loss to you in terms of your investment strategy. Secondly it is much easier to keep track of your investments. If you go through a difficult period you can simply stop paying into your investment account until you?re back on your feet.

Life assurance is extremely important if you have a large financial commitments and/or family dependants. If at all possible, do not cancel your life insurance unless you are sure that you no longer need it. One of your lifetime goals should be to become financially independent (i.e. having enough money saved to maintain your standard of living for the rest of your life) and when that goal is reached you will no longer need life cover. Yes, it?s the old story; the more money you have the more money you?ll save. So get there quick.