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Understanding a policy’s RIY may save you money
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.