Why don’t assurers simply focus on what you need?

t is indeed sad that, for many South African families, if something untoward happens to the breadwinner, the breadwinner’s dependants will be left financially insecure or even destitute.

Risk life assurance should be the top priority of every South African earner. It is the foundation stone of every sound financial plan. It is there to ensure that your family is not left in dire financial straits if you die or are unable to earn a living as a result of injury or illness.

Yet in recent weeks, the life assurance industry has published research showing that, on average, working South Africans between the ages of 18 and 65 are underassured by 62 percent for death and by 60 percent for disability. For the average earner, this translates into a shortfall in life cover of R700 000 and a shortfall in disability cover of R1.1 million.

As a result of under-assurance, most of the 173 000 households that lost an income earner this year because of death or disability are likely to be suffering severe financial hardship.

Despite these frightening statistics, a recent straw poll on what you want to read in Personal Finance showed that there is a very low interest in life assurance products. It’s probably because of the low level of interest in life assurance that the figures are what they are.

I think the life assurance industry itself needs to shoulder a lot of the blame. It has given itself such a bad name, particularly with its investment products, that this is, wrongly, now impacting on risk assurance.

The life industry was surely not surprised when it was recently told by National Treasury that its endowment ( investment) products were not on the proposed shortlist for the taxincentivised medium- to short- term savings products Treasury is proposing as an alternative to tax exemptions for interest earnings.

This comes on top of other signals that many of the life industry’s investment products are not acceptable and probably only survive because of the perverse upfront commissions paid to its armies of product floggers.

IPROBLEMS, PROBLEMS

Other signals that all is not well in the life assurance industry include:

◆ The continuing complaints to the Pension Funds Adjudicator about the way retirement annuity (RA) fund members are hit with confiscatory penalties when they are no longer able to afford to pay contributions or wish to transfer to a better-structured RA.

At a recent conference, a very senior executive of the life industry told me I was being unfair in using the term “confiscatory penalty”. He wants me to use the nebulous phrase “early termination charges”, which, he adds, are perfectly legal.

Yes, they are legal, unfortunately, although forcefully much reduced from the 100 percent that the industry used to charge before the then Finance Minister, Trevor Manuel, intervened in 2005.

The problem is that the structure that allows for the penalties was established to encourage product sales and to ensure industry profits – not in your best interests.

If a contract is unfair, as most of these contracts are, then the consequence of not sticking to the “unfair” contract is a penalty – and the penalty is confiscatory because it unfairly takes away money you have earned and saved.

◆ Intervention by the life assurance ombudsman, Judge Ron McLaren, on the structure of what he calls “legacy” products ( see “Consumers compensated after ombud questions value of ‘legacy’ products”, below). In my view, these are not “legacy” products, because they are still being sold today, either in their traditional form or with adjustments such as awarding “loyalty” bonuses if you stick with the product until maturity.

It is interesting that a senior actuary recently told me (and published in this column three weeks ago) that no one should ever buy an endowment policy or retirement annuity with an underlying endowment policy if there is upfront commission payable, because if you are not able to maintain payments you will be penalised one way or another.

◆ The long list of concerns the Financial Services Board ( FSB) has about whether the life industry is treating you fairly.

Leanne Jackson, head of the FSB’s Treating Customers Fairly division, listed numerous concerns she has about the life industry at a recent FSB briefing to the industry. Among her concerns are:

❑ Misleading claims or slogans used in advertising material.

❑ Cost structures and their impact on your reasonable expectations.

❑ Conflict-of-interest risks in some distribution models.

❑ Obstacles to consumers switching products and product providers.

❑ The extent and application of excesses, exclusions, and pre-existing conditions in risk policies.

❑ The transparency of the implications of “add-on” features, which are used to induce you to buy a product but are not germane to the product.

❑ Disclosure, particularly on the impact of costs on benefit expectations. Jackson says the FSB is currently working with the Association for Savings & Investment SA on a cost-disclosure model that enables comparability between life assurance and non- life assurance products, such as collective investment schemes.

❑ The need for consistent, standardised terminology to describe cost structures.

❑ The need to reduce “early termination charges”. This issue is included in a current review on how you pay for advice and for financial products. The review also relooks the upfront commission structure for endowment policies.

❑ Problems with credit life assurance, the micro-insurance framework, group assurance schemes, and incentives and inducements offered to you to buy products and claims practices.

❑ The white-labelling of assurance products and agreements where the salesperson shares in the profits of the product being sold.

DISHING UP THE SAME

Each of these issues is made up of many facets. The list indicates the extent of the problems within the life assurance industry.

Unfortunately, the industry simply does not seem to get the message. It simply re-engineers its products, finding new ways to dish up the same, and using tricks like offering to pay back your premiums after a certain period – but the payback simply comes from your higher premiums (see “Outsurance defends premium paybacks”, left).

The life assurance industry in South Africa needs to think seriously about its future – in its own interests and those of the millions of South Africans who use it to build and, particularly, protect their financial futures.

If people simply stopped using life assurance investment products, it would not be a train smash – but it would have a downside ( see “Advantages of life assurance investments”, left). However, if you do not use risk products to assure yourself in the event of being unable to earn an income or death, that is a train smash. You should not avoid risk life assurance because the life assurance industry behaves so badly with its investment products.