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

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - Bruce Cameron

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.

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