Critical Year Vs Fully Paid Up Option

Recently there is a famous post on Facebook claiming that a policyholder had been cheated by insurance company for 12 years but when properly explained, the whole incident is actually a misunderstanding.


You might have enrolled an insurance plan in the past and might have encountered the jargon “Critical Year” and “Fully Paid Up” options available in your plan. The jargon might not be comprehensible for a layman on the street. Worst still, the agent advising you might not be explaining clear enough for you. Without clarifying any of the doubts presented, you just signed the dotted line and there was where the premium payment kick started for years to come.
Here in this article, let’s demystify the jargon of “Critical Year” and “Fully Paid Up” into an understandable info for you to digest. Upon understanding this info, you will be well informed on these 2 terms.



Understanding Critical Year and Paid Up Policy

A)  Critical Year

The basic principle of life insurance is that premiums need to be paid throughout the entire policy term. When the Critical Year (CY) feature is selected, it means that insurance companies forecast number of years for bonuses/dividends to be accumulated before the accumulated dividends/bonuses are adequate to pay for future premiums. Please take note that this Critical Year is based on projection, it sometimes create misconception among policyholders that when Critical Year feature is selected, further premiums are no longer need to be paid.


As you understand, company performance will always be up and down and this is conforming to the law of economic cycle. When the declared bonuses and dividends are not meeting the expectation, there is where the accumulated value is lower and indirectly the CY will be arriving slower. This is where the problem starts. If the serving agent proposing this policy with CY features, informing the client that by paying the premium for X years (which is the Critical Year) and thereafter no premium needed to pay, this will be the risk the client will be bearing. There are a lot of clients complain regards this issue, where after their premium payment of X years, they are shock to find out that there is still a need to continuing paying the premium. This happen mainly attributed to the low accumulated value where the CY is deferred and resulting the need to continuing paying the premium to maintain the sustainability of the policy until whole life.


Now, you are clear with this CY….let’s move on to next “Paid-Up Policy”.


B)  Paid-Up Policy

Paid-Up Policy is much straight forward, it merely means that the premium of the particular policy has been fully paid off. Hence, no premium is needed to be paid anymore. At the same time, the coverage will still be continued until the maturity date.

There are 2 scenarios where Paid-Up Policy is used.


1st scenario
For insurance saving plan, there are plans with saving duration ranged from 5, 10, 15 or 20 years.
For example when 5 years saving plan is enrolled, every year there will be premium payment being made. After paying (or saving) for 5 years, the policy will be fully paid up. Thereafter, the policy holder will no longer need to pay the premium anymore (and this is guaranteed). The accumulated bonuses and dividends will be continued until the maturity date. Even there is no more premium paid for this policy, the protection coverage will still be continued until the maturity date.


2nd scenario
In any of the traditional whole life policy you are enrolling, for whatever reasons if you are not able to continue the premium payment in the future and the same time you would wish the continuation of protection coverage, you can choose to convert your policy into fully Paid-Up Policy. With this conversion, there will be no further premium payment needed. There is clause that you need to take note if you were to opt for the conversion…The sum assured of the policy will be reduced in order for the coverage to be extended until the maturity date.

Imagine, if you no longer able to continue the premium payment and yet you are still in need of the coverage, terminating the policy will only means of terminating the protection coverage. But, by converting the policy into fully paid-up, you will no longer have the concern of forking out the premium payment. Although the sum assured is reduced, at least the protection coverage can still be continued for your family.

With the concept demystify above, I hope you have a good time understanding it.



Article Contributor:

Henry Chu,

Editorial Board, SAC Wealth Management Sdn Bhd,

a financial service provider specialises in wealth management for personals and companies.



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