By Bruce Cameron
Most life assurance companies are moving towards letting policyholders off the hook in how they apply limits on maximum penalties if you reduce your payments more than once on a life assurance endowment (investment) policy or retirement annuity (RA) bought before January 1 last year.
Until recently, most life assurers were applying the maximum penalty of 40 percent on endowment policies and 30 percent on RAs each time premiums/contributions were reduced or not paid, plundering the savings of investors. Now, most companies are applying the still-significant maximum penalty only once.
The easing up on applying the maximum penalties more than once on a single policy comes in the wake of the following:
# A determination by the then Pension Funds Adjudicator, Mamodupi Mohlala, against Old Mutual, which had applied the penalty more than once, exceeding the 30-percent maximum allowed, on its RA fund members.
# Jonathan Dixon, the Financial Services Board (FSB) deputy executive in charge of insurance who was involved in drawing up the industry's Statement of Intent (SOI) on the matter, saying it was never the intention that the maximum penalties could be applied repeatedly. He says this has been made quite clear to the industry through its representative body, the Association for Savings & Investment SA (Asisa).
Those applying the maximum penalty more than once say they are entitled to do so because there is no limitation in the regulations on how many times it may be applied.
In terms of the SOI, which the life assurance industry signed in December 2005 with then Finance Minister Trevor Manuel, the industry agreed to limit the confiscatory penalties for what are termed "causal events" to 30 percent on RAs and 40 percent on endowment policies bought before January 1 last year.
Causal events include reducing or stopping payment of premiums/ contributions or cashing in a policy before maturity.
So if, for example, you are in financial trouble as a result of being retrenched and you reduce your contributions to an RA, you will be hit once, and if, six months later, you stop paying altogether because you cannot find a new job and your financial situation deteriorates further, you can be hit again. Mohlala determined that this was not acceptable.
Old Mutual rejected her determination, arguing that its understanding was that it could apply the penalties repeatedly, because no mention was made of repeated causal events in the regulations that gave effect to the SOI. Until the signing of the SOI, assurance companies could and did confiscate up to 100 percent of your accumulated savings at their discretion.
Survey of companies
A Personal Finance survey has found that in the year since Mohlala's determination there is still no common industry approach to multiple causal events.
Asisa says it has not been mandated by its members to seek clarity from the FSB or to come up with a joint industry approach. It has, however, received requests from some members about what other members are doing.
A survey of the biggest life assurance companies reveals that:
# Liberty Life says although it interprets the regulations to mean that the maximum penalty can apply separately to each causal event, in practice it does not apply this interpretation. Instead, Liberty structures its causal event charges so that, in the case of multiple events, the total charges do not exceed the maximum.
# Metropolitan applies the maximum penalty "as a percentage of the part of the fund affected" on each causal event.
# Momentum says it believes that the maximum "exit charges should apply in aggregate by taking cognisance of all causal events on a policy contract". It says that on its newer range of Investo savings products the combined penalty does not exceed the maximum that can be applied. It is applying this principle to older product ranges.
# Old Mutual has gradually backed off its initial firm stance that it was entitled to apply the maximum penalties more than once. It says it has, since the determination of the PFA, unsuccessfully sought guidance from the FSB and others in the industry.
After its initial stance, Old Mutual said in its response to the Personal Finance survey that "we continue to consider fairly in each case where a customer believes they have not received fair value". Old Mutual says it will consider revising already-applied double-dipping penalties only in "each case where a customer believes they have not received fair value".
After seeing a draft of this report, it then backed off completely, saying: "Old Mutual fully and timeously implemented the amendments to the Long Term Insurance Act that brought the SOI into effect. A different view of the intended interpretation of the amendments has subsequently arisen towards the end of 2009, and as such Old Mutual has looked to handle multiple causal events slightly differently while seeking clarity on the issue. Hence the stance that we have now taken that the maximum would apply across multiple causal events."
# Sanlam says it has changed its policy since last year, after consulting the FSB. It says it now charges the maximum on a cumulative basis on all policies that are in force and on those terminated since October last year. It is reviewing all causal-event penalties going back to October last year.
HEALTH WARNINGS
# Never reduce your premiums, stop paying your premiums or cash in a life assurance endowment policy before maturity without checking how much you could lose as a result of the penalties applied by your life assurance company. For policies bought before January 1 last year, the penalty is a maximum of 40 percent of your accumulated savings. No sliding scale need be applied by the assurance company, but the amount may be less, depending on the duration of your policy and the time to maturity.
# Never reduce your contributions, stop paying your contributions, or make a retirement annuity (RA) with an underlying life assurance policy paid up before its maturity date without checking how much you could lose as a result of the penalties applied by your life assurance company. No RA can mature before the age of 55 for tax reasons, but the maturity date on your RA may be set later, at age 60, for example. So you may still be penalised if you are over 55 and surrender it before its maturity date. For policies bought before January 1 last year, the penalty is a maximum of 30 percent of your accumulated savings. No sliding scale need be applied, but the amount may be less, depending on the duration of your policy and the time to maturity.
# Be careful when you take out a life assurance endowment policy or RA. Penalties are still applied. However, since January 1 last year, the maximum penalties have been reduced to 15 percent, decreasing on a sliding scale, on RAs and endowment policies.
No penalties are applied on unit trust investments, including unit trust RA products, which permit you to increase, decrease or stop payments at your discretion. However, beware of life assurance products that have unit trust funds as underlying investments because these also carry penalties.
If you take out a life assurance product, you must be sure that you can maintain your premiums/ contributions. Things to take account of include the possibility of your business closing down, the loss of your job for whatever reason or any other financial crisis that may affect your ability to maintain payments.
# If you switch your endowment policy or RA investment to another life company, the penalties apply when you switch.
# If your endowment policy or RA has risk life assurance (for example, cover against death or disability) attached to it, be aware that any change in your premiums/contributions could result in loss of the cover.
COMPANIES STILL FOOTING THE BILL FOR UNFAIR PENALTIES IN THE PAST
By the end of 2007, the life assurance industry had paid back about R1.7 billion, directly and indirectly, to policyholders on which they had inflicted confiscatory penalties of more than 30 percent on retirement annuity fund (RA) policies and 40 percent on life assurance endowment (investment) polices. When the payback is complete, the figure is expected to be close to R3 billion.
The Financial Services Board (FSB) is about to ask life assurance companies for their most recent figures, up to December 2009.
The payback is in terms of the Statement of Intent (SOI) reached by then Finance Minister Trevor Manuel with the life assurance companies in December 2005 that they should, in future, limit confiscatory penalties to 30 percent on RAs and 40 percent on endowment policies and pay back any amounts that had previously been confiscated in excess of these levels in the past.
Before the SOI, the life assurance industry could and did confiscate up to 100 percent of your accumulated savings, on often inappropriate products which were widely mis-sold by perversely incentivised product-floggers, if there was a "causal event" - when you reduced or stopped paying your premiums or cashed in a policy before its maturity date.
The life assurance companies based their penalties on undisclosed loans, on which they charged you an undisclosed rate of interest, to cover all their costs and presumed profit for the life of the policy, including the upfront commissions paid to their product-floggers. This loan was paid off gradually over the life of the policy. If you altered your premiums or withdrew your money before the contractual maturity date of the policy, the life company would deduct the outstanding amount of the loan from your accumulated savings.
The deduction could result in your losing all your savings in the first few years of the product or substantial amounts in later years. The life companies did not, and still do not, take into account any changes in your personal circumstances, such as acute illness or the loss of your job, that result in your stopping or reducing your premiums, or cashing in your investment.
There was mixed reaction from the big five life assurance companies in providing Personal Finance with details on how much the SOI has cost them individually.
# Liberty Life says the information, which it believes is confidential, has been provided to the FSB.
# Metropolitan says that it estimated in its 2006 annual report that the SOI would cost it R216 million. It avoided answering questions on the actual cost, saying that it does not keep day-to-day records.
# Momentum says that the SOI has cost it R312.3 million, which is higher than the R280 million it estimated in 2006.
# Old Mutual says that, because the SOI was an industry agreement, the figures should be provided as an "aggregate picture" by the Association for Savings & Investment SA.
# Sanlam says that it originally estimated that the SOI would cost it R595 million. To date, 95 percent of this amount has been attributed and it believes the balance of five percent will still be required for future causal events. Sanlam's figures include the Professional Provident Society policies and RAs for which the life assurer is responsible.
CONTACT
For complaints concerning:
# Retirement annuities: Call Charles Pillai, the Pension Funds Adjudicator, on 087 942 2700 or email enquiries-jhb@pfa.org
# Endowment policies: Call Judge Brian Galgut, the Ombudsman for Long-term Insurance, on 0860 103 236 or email info@ombud.co.za
# Financial advice: Call Noluntu Bam, the Ombud for Financial Services Providers, on 012 470 9080 or email info@faisombud.co.za
From Personal Finance published on June 26, 2010
