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Un­der­stand­ing a pol­icy’s RIY may save you money

Finweek English Edition - - The life offices’ association -

THE LIFE OF­FICES’ AS­SO­CI­A­TION (LOA) is con­cerned that many pol­i­cy­hold­ers con­tinue to make de­ci­sions re­gard­ing in­vest­ment poli­cies with­out prop­erly con­sid­er­ing or un­der­stand­ing the ef­fect of charges.

Ger­hard Jou­bert, CEO of the LOA, says that in line with the LOA Code on Pol­icy Quo­ta­tions mem­ber life of­fices of the LOA now pro­vide con­sumers with a re­duc­tion in yield (RIY) fig­ure to ad­dress that prob­lem.

Jou­bert says the com­plex­ity of charg- ing struc­tures of­ten makes it dif­fi­cult for clients and their ad­vis­ers to con­duct proper com­par­isons of charges be­fore de­cid­ing on a prod­uct. The LOA there­fore in­tro­duced a new Code on Pol­icy Quo­ta­tions in 2005, which re­quires all LOA mem­ber com­pa­nies to sum­marise all their ac­tual charges in one fig­ure, re­ferred to as the RIY, which must be clearly shown on all quo­ta­tions for new sav­ings and in­vest­ment poli­cies.

It’s of con­cern, says Jou­bert, that many clients don’t un­der­stand the im­por­tance of con­sid­er­ing the RIY fig­ure when choos­ing a sav­ings prod­uct. “Sim­ply put, the RIY sum­marises all the charges that you’ll pay on a spe­cific pol­icy and ex­press them as a sin­gle fig­ure that shows how much of the an­nual in­vest­ment re­turn of your pol­icy is needed to cover the pol­icy charges. The lower the RIY, the lower the pol­icy’s charges – leav­ing you with a higher net in­vest­ment re­turn from your pol­icy ev­ery year.”

Un­der­stand­ing the RIY

The charges that are levied against any in­vest­ment or sav­ings pol­icy are gen­er­ally a com­bi­na­tion of the fol­low­ing: • Ini­tial fees. • An­nual ad­min­is­tra­tion fees. • An­nual man­age­ment fees. • Per­for­mance fees. • Fixed rand or per­cent­age pol­icy fees.

Jou­bert says by sum­maris­ing the above charges in one fig­ure, the RIY gives fi­nan­cial ad­vis­ers and clients a sim­ple, ac­cu­rate way of analysing and com­par­ing the charges of dif­fer­ent com­pa­nies and dif­fer­ent prod­ucts and helps clients choose a prod­uct that’s fairly priced.

If you see an RIY of, say, 3% on the sav­ings prod­uct you’re con­sid­er­ing you know that the gross in­vest­ment re­turn earned on your pol­icy will be re­duced by 3% ev­ery year. If the gross re­turn is 15%/year then you can ex­pect to earn 12% on your pol­icy af­ter charges.

Also, if you com­pare sim­i­lar prod­ucts from com­pet­ing life com­pa­nies you’ll im­me­di­ately know that the low­est RIY in­di­cates the low­est charges. How­ever, ap­ply some cau­tion. The cheap­est prod­uct isn’t nec­es­sar­ily al­ways the best. With the help of your ad­viser you need to con­sider the prod­uct fea­tures to­gether with the cost im­pli­ca­tions, as il­lus­trated by the RIY fig­ures.

For ex­am­ple, a sav­ings pol­icy that of­fers guar­an­tees or is in­vested in a smoothed bonus fund will be more ex­pen­sive than a pol­icy in­vested in a mar­ket-linked fund. Also, an in­vest­ment in a money mar­ket fund would typ­i­cally carry a lower RIY than an in­vest­ment in an eq­uity fund. Some poli­cies might dis­play higher RIY fig­ures, es­pe­cially if the un­der­ly­ing funds ap­ply per­for­mance fees. But then the higher charges may be war­ranted if those funds con­sis­tently out­per­form their peers and their bench­marks.

Jou­bert says when se­lect­ing a sav­ings pol­icy your ad­viser should help you se­lect sev­eral that of­fer sim­i­lar fea­tures likely to help you meet your sav­ings needs.

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