OUTSURANCE DEFENDS PREMIUM PAYBACKS
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.