Weekend Argus (Saturday Edition)
Is anyone satisfied with their old-style contractual investment policy?
LAST week’s column on the penalties associated with the contractual investments flogged for decades by salesmen representing the big life assurance companies elicited a number of “it-also-happened-to-me” responses from readers, among them one from Paul in KwaZulu-Natal.
Paul and his wife had seven such policies, which, in 2004, he cancelled “after my eyes were opened regarding the poor products in which we had invested our hardearned money”.
Paul produced a table of his losses (see table, right), which makes for interesting, if depressing, reading. As was the case last week, I will refrain from singling out the companies concerned because they were all equally bad.
In total, Paul lost about a third of the money he had invested over at least 18 years. He lost more if you take into account inflation over the period, and substantially more if you consider the lost opportunity of putting the money in a real investment.
Paul and his wife had further Type of product Endowment policy Endowment policy Retirement annuity Endowment policy Study policy Endowment policy Endowment policy Total
Years contributed 18
13
13
8
7
7
9 trouble with a retirement annuity (RA) they subsequently took out with a life company that was sold to them as a “unit trust RA”. However, it, too, had contractual conditions.
“We wanted to reduce my wife’s contribution (which started at R250 per month and which we increased to R2 500 per month) back to the original R250, but this attracted a
Own contributions R19 211 R17 509 R17 362 R17 977 R10 814 R11 498 R17 236 R111 610 Surrender value paid out R23 334 R7 697 R13 589 R3 692 R3 789 R9 052 R15 659 R76 816 penalty of over R30 000. This change was brought about by a fear that she might be retrenched in December 2014. I decided to do a section 14 transfer to a new Coronation RA and pay the R30 000-plus penalty once instead of reducing the premium to R250 and maybe facing another penalty if we were forced to cancel the policy at a later stage. Our fear was justified when my wife was retrenched in February 2015. By this time, the Coronation RA was running and we stopped contributions, with no penalties imposed by Coronation.”
Paul concludes: “I will never deal with any of the life insurance companies that were in operation before 1994. I stay away from them as far as possible.”
WIDER PROBLEMS
The problems with the oldgeneration contractual RA and endowment policies went a lot further than the “confiscatory penalties” imposed if you stopped or reduced your contributions or, in the case of Paul, transferred to another provider. They also lay with their opacity when it came to costs and investment returns, as well as the enticements to prospective investors in the form of “illustrative maturity values”.
Here, let’s turn to my own experience.
In 1988, a year or two after starting my first “real” job, I signed up for a contractual RA. It was to run for 30 years, and my contribution was a princely R100 a month. The quoted “illustrative maturity value” was about R530 000.
A few years later, I upped the premium to R150 and then to R173, more or less the maximum at the time on which I could claim a tax deduction. It has remained at R173.
Three decades came and went, and the policy matures next month, when I shall transfer it to a unit trust RA I took out some years ago. The amount to be transferred: just over R250 000, or less than half the illustrative maturity value at inception. This represents an annual return, over those 30 years, of a miserable 7.4%, which about equals the average inflation rate over that period. (Don’t forget that inflation was in the mid to high teens in the late 1980s and early 1990s.)
No investment is risk-free, and, as I mentioned last week, back in the ’80s there wasn’t much else to choose from for long-term savings. But I believe that the interests of the customer did not come first in the design or marketing of these old-style contractual products, particularly the RAs. I invite readers satisfied with the performance of policies they bought more than 10 years ago to persuade me otherwise.
That said, there is a case to be made for new-generation endowment policies to be used by the right people under the right circumstances – something I will explore next week.
martin.hesse@inl.co.za