From the beginning of December, the life industry’s statement of intent, which sets the new minimums in terms of surrender values, comes into force. This has major implications for people who have made changes to their retirement annuities, endowment or whole life policies since January 2001, but it also means that anyone making changes to their policies from December 1 2006 will be guaranteed a minimum surrender value.
There is a genuine concern in the industry that unscrupulous insurance brokers will use this opportunity to convince clients to cancel existing polices and to take out new ones. They may argue that clients should take advantage of the change to switch policies. But there are two reasons you as the policy holder should be wary.
Firstly, the maximum permitted charge for making changes to RAs is 30%. Depending on how long the policy has been held, it is hardly an incentive to switch.
Secondly, brokers have a window period in which they will still be paid their commission up front. Although the life industry and the National Treasury will be formalising legislation around commissions in the new year, Gerhard Joubert, executive director of the Life Offices Association (LOA), says it will take several months before it is fully implemented. This will limit the amount a broker is paid up front ,with the bulk of commission paid over a period of time to encourage brokers to provide ongoing services to their client base.
‘Over the next eight months, policyholders should be very cautious about making changes to their policies and should get a second opinion,” says Joubert. Although the life companies offer so-called ‘new generation” products, which offer greater flexibility, with ‘old generation” RAs most of the costs have already been paid off and it be better off sticking with the current product, Joubert says.
According to Steven Levin, general manager of product solutions for Old Mutual, there should be no reason for a RA member to cancel one policy and take out a new one.
Most of the life companies allow investors to transfer from older policies to ‘new generation” products without additional charges or penalties. While a policyholder may wish to switch for greater fund choice, Levin warns against making investment choice the main focus as it brings its own complications.
‘There is nothing wrong with a balanced fund or smooth bonus fund,” says Levin.
If your broker advises you to stop your current RA and take out a new one, you have to ask if it is worth the penalty fee.
What it means
If you made changes to your RA between January 2001 and November 30 2006, you will receive an enhancement to your fund if the value of your policy after the change was less than 65% of the previous fund value.
For policies still on the books, this will be done automatically.
If your RA lapsed or matured after changes were made, you will need to contact the life office that administers the policy. In these cases, the additional value will be paid out directly to the ex-policyholder but the onus is on the individual to contact the life office.
The industry is waiting for the minister of finance to decide how these proceeds will be taxed before they will release them.
If you are the beneficiary of an RA member who has died, it may be worth contacting the life office to see if the policy was affected.
Life companies have six months in which to adjust values or pay out refunds.
Interest will be paid from the date of the contractual change to the date the refund is paid.
From December 1 2006, if you make a contractual change you are guaranteed a minimum fund value of 70% of the value before the change.