Consumers compensated after ombud questions value of ‘legacy’ products
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.