Guest Contributor | Jul 3, 2019 | 0
Private Portfolio – The end of the life insurance guarantee
You may have had the same experience as I that a car’s battery always seems to pack up in winter just a month or so after the expiry of its guarantee period.
Early September 2011 I also capped this column with a similar headline. It was at that time when many holders of Old Mutual life insurance policies that were taken out in the 80’s and 90’s were told that the guarantee period on their policies was about to expire and what the consequences thereof would be.
To keep the life cover benefit intact the clients were offered the option to convert the existing benefits to a new policy under a new product range.
This conversion was available without any medical evidence of good health but the premium for the benefit is calculated on the client’s current age and not the age when the previous policy was taken out. Many of these guarantee terms were15 years so you can imagine what a fifteen year age difference does to an insurance premium. In my previous article on this topic I cited an example based on one of my own policies where the guarantee is to expire soon. The current premium of N$740 per month will escalate to N$2600 per month if I were to convert a so-called South African policy taken out in Namibia prior to 1998 to a new policy unless one had a South African bank account to fund it’s premiums. Due to this impediment I already had to kiss one policy good-bye.
Unfortunately not many policy holders or financial advisers were totally aware of either the existence or the implications of a premium guarantee period mentioned in policy contracts.
The new generation life insurance products currently on offer do not have cash surrender values that underpin the life cover and much more prominence is given to guarantee periods.
Premiums on these policies can now be manipulated by playing with the guarantee periods with or without the knowledge of the potential client. Furthermore there appear to be differences on what can happen on expiry of a guarantee period between insurers.
However, the reason why I am repeating some of the issues raised in 2011, is because now it is Sanlam’s turn to face policy holders whose policies are about to default due to expiring guarantee terms.
Unlike Old Mutual they appear to be more transparent in their offering. Not only are the options financially more attractive, they also do not make a distinction between so-called South African currency policies and Namibian policies. Namibian policy holders get the option on all their affected policies.
Sanlam has indicated that about 60,000 policies are in issue. That is quite a massive number and I don’t want to guess what Old Mutual’s equivalent figure amounts to.
It would also be interesting to know how much life cover and other benefits are in total at stake. This would also then lead to the next question of how much risk liability falls away if these conversion options are or cannot be exercised.
Sanlam’s offer to their clients is quite different to that of Old Mutual. They do not offer the option to convert to a new product at a new premium based on a higher age. Instead they offer a compulsory 5% per year increase on the current premium to keep the existing benefits or alternatively decrease the existing benefits by 5% per year and keep the current level premium.
Added to this the client can change in later years from the first option to the second option. This accommodates people that at some stage cannot afford further escalations but still keep a measure of cover decreasing over time.
Comparing this offer with that of the other insurer in my example above, then my premium of N$740 per month that would immediately increase to N$2600 per month would now, under a 5% per year escalation, take more than 25 years to reach that higher premium.
By that time I should statistically be pushing up daisies.