Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Pre­mium pay­backs on risk life as­sur­ance poli­cies cost you as much as 30 per­cent ex­tra on ev­ery pre­mium you pay – so they are no free lunch.

But Ernst Gouws, chief ex­ec­u­tive of Out­surance, says that, in ef­fect, you re­ceive a 15-per­cent an­nual re­turn, with no tax payable in your hands, on the ad­di­tional amount you pay per pre­mium.

Gouws says the rea­son for the in­tro­duc­tion of pre­mium pay­backs by Out­surance Life is to ad­dress the age-old prob­lem of the con­sis­tently high level of lapses on life as­sur­ance poli­cies.

“Clients of­ten stop pay­ing their premi­ums be­fore they reach a point when they could claim against the pol­icy (for ex­am­ple, for death or dis­abil­ity). If you con­tinue to take out new life as­sur­ance poli­cies, only to lapse them shortly there­after, then the only per­son who gains is the bro­ker, who is paid up­front com­mis­sions,” Gouws says.

In terms of the Out­surance prod­uct, the com­pany guar­an­tees that you will re­ceive your premi­ums back in cash af­ter 15 years, if you still have the pol­icy in place and haven’t claimed.

The av­er­age monthly pre­mium of a new Out­surance pol­icy is roughly R500 (in­clud­ing the con­tri­bu­tion to the pre­mium pay­back) and the av­er­age sum in­sured is roughly R1 mil­lion. So, the guar­an­tee is that you will re­ceive R90 000 back af­ter 15 years if you did not claim and if your pol­icy is still in force.

Should you suf­fer an in­ci­dent dur­ing that pe­riod for which you are cov­ered, you’ll get your R1 mil­lion as­sured ben­e­fit but not the pre­mium pay­back.

Gouws says the ad­di­tional 30 per­cent you pay on your premi­ums is fully dis­closed to you be­fore you take out the pol­icy. You can choose not to take the pre­mium pay­back guar­an­tee.

How­ever, he says, if you do, you are get­ting a good deal, be­cause you are re­ceiv­ing a 15-per­cent (8.5 per­cent af­ter­in­fla­tion) av­er­age an­nual re­turn.

He says that de­spite this, the pre­mium pay­back struc­ture is not a sav­ings prod­uct. The pol­icy purely of­fers risk cover, and has no sur­ren­der or ma­tu­rity value. The pre­mium pay­back “re­wards you for not laps­ing your pol­icy”.

Gouws says that Out­surance en­gaged the Fi­nan­cial Ser­vices Board on the prod­uct and it agreed that if the ap­pro­pri­ate dis­clo­sures were in place the prod­uct could be mar­keted.

On whole-of-life poli­cies, the ben­e­fit is sim­ply a re­turn of all your premi­ums paid af­ter the first 15 years of cover. There­after, your pol­icy and cover con­tinue as nor­mal but with a 30-per­cent pre­mium re­duc­tion.

Gouws says that to de­ter­mine whether you are re­ceiv­ing value for money with the pre­mium pay­back, you need to con­sider what you could do with 30 per­cent of, for ex­am­ple, a R2 000 pre­mium. You could:

◆ Re­duce the monthly premi­ums to R1 400 for your life cover and com­pare that rate with what other in­sur­ers of­fer you for the same level of cover. If you think you can get a bet­ter deal else­where (on both the cover cost and the in­vest­ment re­turns) you could save the R600 in any other in­vest­ment ve­hi­cle; or

◆ Take out the pol­icy with the pre­mium pay­back, which will cost you R600 a month more. Af­ter 15 years you will re­ceive R360 000, which equates to a guar­an­teed af­ter-tax nom­i­nal re­turn of 15 per­cent a year, with no fees or com­mis­sion.

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