Con­sumers com­pen­sated af­ter om­bud ques­tions value of ‘legacy’ prod­ucts

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - BRUCE CAMERON

A num­ber of pol­i­cy­hold­ers have seen their life as­sur­ance in­vest­ment pol­icy val­ues im­prove af­ter the in­ter­ven­tion of the Om­buds­man for Long-term Insurance, Judge Ron McLaren, opened the way for other pol­i­cy­hold­ers to com­plain if they are dis­sat­is­fied with their val­ues.

Par­tic­u­larly af­fected are poli­cies is­sued many years ago as part of the so­called “legacy busi­ness”. On th­ese legacy poli­cies, high costs were de­clared, but they were mis­lead­ing.

McLaren, com­ment­ing on one com­plaint, says that it has to be asked why any life com­pany “would de­velop and sell such a prod­uct, as it does not seem to pro­vide real value to pol­i­cy­hold­ers”.

He says life as­sur­ers may now do busi­ness on a dif­fer­ent ba­sis, but they can­not sim­ply dis­re­gard th­ese old poli­cies, which hold poor value for in­vestors.

He says th­ese legacy poli­cies may need fur­ther at­ten­tion, es­pe­cially where the ini­tial prod­uct de­sign was not ap­pro­pri­ate for the tar­get mar­ket.

At least two un­named com­pa­nies are re­view­ing legacy poli­cies to im­prove ben­e­fits af­ter McLaren’s in­ter­ven­tion.

The judge does, how­ever, point out in his in­ter­ven­tions that the poli­cies had been in­her­ited by the two com­pa­nies when they took over other life as­sur­ance com­pa­nies. They did not de­velop the poli­cies them­selves.

One of th­ese was a pure in­vest­ment pol­icy taken out in Fe­bru­ary 2007, with a term of five years and an ini­tial monthly pre­mium of R550, escalating by 10 per­cent a year.

The premi­ums paid over five years to­talled R37 877 but the in­vestor re­ceived only R36 465, de­spite the life com­pany claim­ing av­er­age an­nual in­vest­ment re­turns of 6.98 per­cent.

At in­cep­tion, the in­vestor was in­formed that the pro­jected pay­out value would be R41 000 if in­vest­ment re­turns av­er­aged 10 per­cent a year, in­fla­tion was be­tween eight and 10 per­cent, and the re­duc­tion in yield (re­turns) be­cause of costs was be­tween four and six per­cent. The pro­jected pay­out would be R46 300 if the gross re­turn was 16 per­cent a year, in­fla­tion was be­tween eight and 10 per­cent, and the re­duc­tion in yield was 10 per­cent.

The dif­fer­ence be­tween the ac­tual ma­tu­rity value and what was paid in premi­ums plus in­vest­ment re­turns was the high costs of the pol­icy, which to­talled 14.2 per­cent (R5 410).

McLaren says the chances of the pol­i­cy­holder get­ting a real re­turn given the high charges on the pol­icy were “re­mote”.

He also says that the ex­am­ple shows that the cost dis­clo­sures do not al­ways alert a pol­i­cy­holder to the im­pact of high charges.

“It is un­likely that the pol­i­cy­holder would have en­tered into the con­tract had he fully un­der­stood the im­pli­ca­tions of the dis­clo­sures.

“The quo­ta­tion dis­closed what the re­duc­tion in yield was and dis­closed that, even at a gross re­turn of 10 per­cent, the net re­turn would be only 0.7 per­cent, and yet the pol­i­cy­holder pur­chased the pol­icy.”

He says the ex­am­ple demon­strates that dis­clo­sure of costs by it­self is not a panacea for all ills, par­tic­u­larly in an un­so­phis­ti­cated mar­ket, where the poli­cies were sold.

In this case, the pol­i­cy­holder ac­cepted an of­fer from the life as­sur­ance com­pany of an ex­tra R7 419.

In another ex­am­ple, val­ues were im­proved on two ed­u­ca­tion poli­cies that were each sold with a 30-year term.

The two poli­cies, which did have a small risk as­sur­ance por­tion, started in June 1992 with a pre­mium of R30 a month which in­creased over 19 years.

Af­ter 19 years, the premi­ums paid on each pol­icy to­talled R32 127 and they had a sur­ren­der value of R36 252.

Af­ter the in­ter­ven­tion of the om­buds­man, the life as­sur­ance com­pany in­creased each of the poli­cies by R10 455. A com­pen­satory amount of R3 000 was paid be­cause of the firm’s poor han­dling of the com­plaint.

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