The measures that could see a revolution in the way the life assurance industry goes about its business which were published this week by National Treasury, are long overdue.
Personal Finance has campaigned long and hard over the past 10 years for these changes to be made.
It is only a pity that the industry, in line with its reputation for arrogance, refused to listen and will now be forced by law to change its ways.
However, it is pleasing to see that at last, one major company at least , is voluntarily making fundamental changes which anticipate the National Treasury's proposals.
I have said on numerous occasions when companies put you first, Personal Finance will acknowledge the change and support these companies.
Liberty Life has launched the Excelsior 1 000 Series, which proves that life companies can offer you simply structured retirement and savings products that are low cost, have limited investment choices and carry low penalties should you be unable to pay your premiums.
The new range addresses many of the fundamental problems with current life assurance policies, which include confiscatory surrender penalties when you can no longer pay your premiums; perverse commission structures which encourage intermediaries to mis-sell products; investment choices that are complex and expensive; and high costs in general.
The features of the Excelsior 1 000 range are:
1 Product options.
The options offered by the product are available as a single- or recurring-premium life assurance (endowment) policies or retirement annuities (RAs).
The minimum recurring premium for an endowment policy is R350 a month and R150 a month for the RA. The minimum single premium for both is R25 000.
2 Low costs.
Based on a recent Personal Finance survey of the costs of an RA with a premium of R1 000 a month and an assumed investment growth of 10 percent a year, the Liberty product is now the cheapest of the RAs with a five-, 10- or 20-year maturity term offered by the main life assurance companies.
A Personal Finance survey last year identified Old Mutual's under-publicised unit trust RA as the cheapest around and its life assurance Max product among the more expensive.
The Old Mutual unit trust RA was later beaten on costs when Allan Gray launched a (direct sale) unit trust RA.
The Allan Gray product is still ahead of the Liberty RA product on costs over five and 10 years, but not over 20 years.
The annual reduction in yield on the Liberty RA investment as a result of costs is 3.5 percent on a five-year investment, 2.2 percent on 10 years and 1.7 percent on 20 years.
3 Investment options.
There are a number of investment choices available to you:
- A simple, low-cost, risk-adjusted range of five investment managed portfolios investing in cash, bonds, equities and property which is managed by Liberty's associated asset manager, Stanlib.
- Ten specialist portfolios, such as pure equity or pure interest-earning funds, also managed by Stanlib.
- Five risk-adjusted, multi-managed funds offering underlying investments into a range of asset managers with Stanlib Multi-manager selecting the asset managers.
- Five offshore risk-profiled multi-managed funds.
- Six "house view" portfolios, one of each is managed by Investec, Coronation, Old Mutual, Sanlam, RMB and Oasis. You are allowed one free switch a year. Thereafter a switch to another portfolio will cost you R100.
- Dramatically reduced surrender penalties. If you surrender a policy within 30 months of taking it out,
you will be penalised 15 percent of your premiums. Thereafter, the penalties decrease by 0.5 percent a month to zero after five years, even if your policy term is 10 or 20 years.
These conditions are far better than those contained in the interim agreement reached between the life assurance industry and Finance Minister Trevor Manuel last year.
If you run into financial difficulties and cannot afford to pay your premiums, the Liberty product allows you to make a recurring premium investment paid-up and reinstate it within six months without incurring a penalty. There is an administration fee of R250.
4 Commissions.
You and your financial adviser can choose one of three commission structures:
- Paying commission as and when you pay each premium;
- Paying commission every five years in advance; or
- Paying a lower commission upfront plus one percent of each premium as and when you pay it.
Unlike other companies that offer you products with a choice of commissions, with the Liberty product range there will be no difference in the cost charged to you.
If you change your adviser during the term of the policy, the new adviser will receive 50 percent of the outstanding future commission.
Stuart Wenman, Liberty's product development actuary, says the objective is to stop churning.
In other words, a new financial adviser will not have a perverse incentive to convince you to surrender an existing policy and to take out another policy purely to generate commission.
5 Saving incentives.
The product provides you with bonuses every five years to encourage you to maintain your investment as long as possible. The bonus scale increases the longer you stay invested.
Furthermore, you may receive even larger bonuses if you were to take out more than R1 million of risk life cover from Liberty.
The investment product is kept separate from the risk life cover.
So, if you run into extreme financial difficulty you will not have to cancel your life cover, as often happens when investment and risk cover is provided in one universal policy.
Wenman says the purpose of building bonuses into the products is to encourage policyholders to save for the long term.
"It is over the long term that investors cancel out costs and market fluctuations and get real value on their investments benefiting from the effects of compound interest and the longer period over which premiums are paid," Wenman says.
6 Add-ons.
You can add on various bells and whistles at additional costs. These include:
- Retrenchment cover. If you are retrenched and do not find another job within a month, Liberty will cover your premiums for 12 months even if you find a job within that period.
- Maternity benefit. If you take out the personal pension (RA) option, you can suspend your premium payments for up to six months while you are on maternity leave.
- Disability cover. If you become disabled and this results in a loss of income, Liberty will meet all your premiums until the earlier of either your pre-selected investment period or age 60.