Paying to protect yourself against possible risks
Life assurance is one of the few ways by which you can invest money in relatively small amounts to protect yourself against the three main perils of life – dying too soon, disability or living too long.
With many policies specifically geared to counteract inflation, assurance is one way that you can create a substantial instant estate. Remember, however, that although there is no limit to the amount of assurance that you may take out on your own life, cover running into millions of rands may often entail exhaustive financial inquiries to preclude the possibility of fraud.
Life assurance is carefully protected by the state to ensure security for those who invest in policies. The Insurance Act, 1943, governs the activity of assurers and those who market insurance. Among the laws that deal with life assurance are the Income Tax Act, 1962, the Estate Duty Act, 1955, the Pension Funds Act, 1956, the Stamp Duties Act, 1968, the Insolvency Act, 1936, and the Matrimonial Property Act, 1984.
Two types of assurers operate in >South Africa:
While in theory mutual societies distribute their entire surplus to policyholders, they nevertheless have to build up large reserves in the same way as companies do to acquire capital. Life assurance should not be confused with retirement annuity plans, which are essentially pension plans that qualify for tax concessions on contributions.
In order to take out a life assurance policy, particularly for another person, you must have what is known as an insurable interest in the life of the person to be insured. This important point is not enshrined in the Insurance Act, but arises from the common law. It puts an onus on the assured person to prove that his or her death or disablement would lead to some form of loss or reduction of a right. And yet, although insurable interest must exist when a policy is taken out, it need not endure to the date of payment.
You have an unlimited insurable interest in your own life and that of your spouse. Moreover, because South African law places a legal obligation on parents to support their children, and reciprocally on children to support their parents (but not their in-laws) and grandparents who are unable to provide for themselves, an insurable interest is created by this responsibility. Other than this, a parent does not normally have an insurable interest in the life of a child, or a child in the life of a parent, unless special circumstances exist, such as the parent or child having a financial interest in the other person, for example, in business.
A limitation on the amount for which a child may be insured is set out in section 50 of the Insurance Act, which specifies a maximum of R10000 if the child is under six years of age, or R30000 if between six and 14.
This limitation does not imply that assurance for children should not be taken out. Savings that are commenced early accumulate bonus additions, or growth, from inception for needs that become more apparent later in life. The combination of compound interest, lower taxation for assurers, and regular savings can produce worthwhile results. A policy that takes a long time to mature makes sense in view of the health aspect of assurance – children have little difficulty in being accepted for assurance. Longer term policies can always be shortened in whole or part if necessary, or converted to another type of insurance – such as from a life policy to an endowment policy.
Life cover for people who are HIV-positive
Until recently life assurance companies worldwide were not prepared to issue life policies to people found to have full-blown aids nor to those who tested hiv-positive.
In 1996, a South African company, Metropolitan Life, broke the mould with the unveiling of its Inclusive Life policies, which offered cover to people with historically ‘uninsurable’ conditions.
Among individuals the company offered to service were hiv-positive persons (provided they had not yet developed symptoms of full-blown aids). In terms of the policy, HIV applicants had to meet certain medical criteria and had to be over 14 years of age, but under 55.
The maximum sum assured was pegged at R50000, with premiums starting at R125 a month (for a R10000 life cover). Because this type of policy was linked to an investment fund, it was estimated that the amount payable at death would probably be considerably greater than the sum assured.
Applicants and policyholders were given the assurance that their condition would be kept confidential, with their policies showing no indication of the HIV status. Moreover, a toll-free help line (0800-220-855) was set up to enable them to deal directly with the minimum number of staff members given access to their medical details.
How to take out life assurance
Life assurance is sold in South Africa by both agents and brokers.
AGENTS An agent serves as a representative between the assurer and the proposer by completing the proposal form, collecting the first premium and delivering the contract after the underwriter has decided to accept the risk. The agent is not an employee, but a person engaged by the company to sell assurance or insurance policies. An employee of the assurer or insurer may also enter into contracts on behalf of the employer.
Normally the agent cannot change the provisions on the proposal form issued by the assurer or insurer.
Generally, a life-assurance canvassing agent is not an agent in this sense. Normally, the only authority the canvassing agent has is to obtain the signature of a prospective assured person to the proposal form for submission to a principal, the assurer. The assurer then decides whether to accept the offer made on the proposal form.
BROKERS Assurance or insurance brokers act principally as agents for their clients, the proposed assured or insured, to obtain assurance or insurance. They may, how-ever, also have authority to act as agents for the assurers or insurers they decide on. In theory, brokers represent all assurers or insurers, but in practice they select a few for most of their business. Many brokers are self-employed and work on their own, or in small groups.
Banks and other financial conglomerates (sometimes with assurer assistance) have their own brokerage arm, but they guard their independence jealously.
Virtually everyone who sells life assurance (which is quite different from, for instance, comprehensive motor vehicle or household or all-risks insurance) on a full-time basis has received some form of training, and periodically returns for refresher courses or extended training. Those who work on their own are supplied with up-to-date information by the assurers about changes that affect the industry.
Life-assurance agents have a commission contract with the assurer or each of the assurers they represent. The same holds true of life-assurance brokers. Commission for brokers and agents is governed by regulations under the Insurance Act, which prohibit, specifically with regard to brokers, payments or additional benefits outside the scale.
Assurance may not be sold conditionally or coercively – although a person who lends money, renders a service, lets goods or grants credit may insist that assurance be taken out if the existing security is inadequate. Even then, the Act insists on a free choice of both intermediary (that is, the broker or agent) and assurer. Furthermore, an existing policy can be used as collateral security. Section 23c of the Act specifies that compulsion can exist only where insurance (not life assurance) is required on mortgaged land – for fire and storm cover – and not a policy on the life of the borrower. This means that a person buying a home with a mortgage bond may have to insure the house – but not his or her own life
Warning – Selecting an agent or broker
The fact that there are as many knowledgeable agents as there are ignorant brokers makes it extremely difficult to choose a suitable agent or broker.
And yet, if you intend investing a large sum of money over a lifetime, the continued services of a reliable broker or agent is imperative.
Many brokers and agents belong either to the South African Insurance Brokers Association (saiba), the Independent Brokers’ Council (ibc) or the Life Underwriters Association of South Africa (luasa), which have codes of ethics (although membership of these associations should not be regarded as a guarantee that the broker or agent is suitable).
Furthermore, an agent who is a Fellow of the Institute of Life and Pension Advisers (filpa), would have passed an examination covering all aspects relating to life assurance and estate planning – and this will be an added indication of competence.
Make sure that a broker or agent who has been recommended to you is suitably qualified to advise you. If you’re satisfied, hand all your life assurance matters over to this person.
A good broker or agent will advise you to review your portfolio from time to time – especially if your risk profile or financial circumstances change. You can always change a policy to suit new circumstances.
Your professional adviser (intermediary) should preferably be qualified to help in matters relating to assurance, especially finance (investments, loans and the like) and have an extensive knowledge of accounting and the law and practice of income tax, estate duty, wills and trusts, and various other relevant matters.
A good intermediary is vital in the complex world of life assurance – and the fact that this person’s income is probably dependant on commissions paid by the assurer means that this service is likely to be free. While it may be economical to listen to free advice and purchase from someone who is not as highly skilled but who is willing to break the law by sharing the commission with you, you may run the risk of cutting yourself off from expert help later.
The Insurance Act prohibits the offer of any incentive to persuade someone to take out life assurance, including the payment of part of the commission.
Which type of policy?
Because skill in selecting the right policy is vital, your broker or agent will question you closely about existing assurance and other investments, examine your circumstances, wishes and needs, and read and interpret your pension (or provident) fund rule book before analysing your situation.
The choice of policy is not based on scientific formulas, but it relies on the experience and training of the broker or agent. This means that it is often possible to have different solutions to the same problem. It doesn’t matter what you might think or have been told, there is little new in the components of life assurance. In fact, although there are various brand names on the market, all consist of various mixtures of the three main ingredients: term, life (or whole life) and endowment assurance.
TERM The product with the lowest premium – but probably the most expensive of the lot – is term. The assurer undertakes to pay you or your beneficiaries a certain sum of money if you die or are disabled within a specified time. If you don’t die or become disabled, the assurer keeps the premiums and you get nothing back. Term can be packaged in many different guises – such as reducing, level or increasing.
Many term policies have a conversion option, which allows you to alter the temporary protection given by a term policy into permanent assurance – without having to take a new medical test or stating the occupation you are involved in. Because the premiums are those applicable at the time a conversion is undertaken, there is no monetary advantage. However, there is an advantage if your health is not as good as it was when the original policy was taken out.
The same principle applies to group life insurance, which is often provided by employers. This group-life cover is usually a multiple of salary, and while subject to minimal income tax, it is seldom sufficient for the needs of a growing family.
Simple arithmetic will show that if you can obtain 10 per cent interest on capital invested, you need 10 times your annual income to provide the same continued support for the family. Remember that group life is temporary insurance (albeit at its cheapest) that will probably die before you do, and may end when you change jobs or retire, or if the employing firm is taken over, or goes insolvent.
Term insurance is useful in any temporary situation: while children are growing up, to cover a debt such as a mortgage or to protect an individual in the process of establishing himself or herself with limited income.
A specialised form of term insurance exists in income benefits, often added to a basic policy but available on its own. In this case, should death (or disability) occur within a specified period, a monthly cheque for a stated amount will be paid to a dependant for a specified period (or to the estate). This figure can be inflation-matched, increasing annually (for an additional premium) or grow at a definite rate once a claim is lodged. Alternatively the beneficiary can be paid out in a lump sum.
Quick Tip – Insist that your broker or agent puts anything important in writing size=”3″>
Many forms include a declaration that statements not incorporated in the proposal form will not be binding on the assurer. Therefore, if your agent or broker tells you anything important, insist that it be written on the proposal form and remember to keep a copy.
LIFE This type of assurance pays only when death (or disability) occurs. Premiums are payable until death or for a set number of years. The conditions of such a policy may be altered unilaterally by the holder of the policy to:
The whole-life policy is a useful way of covering possible estate duty or to repay specific debts at an uncertain future date. As premiums generally remain constant and the policy acquires a cash value, it is more economical in the long run than a term policy and will pay higher dividends in the end. It makes sense to invest in this form of assurance when your income is relatively low, but permanent assurance is needed. Later, when the children have grown up and become self-supporting, the life policy can be converted to pay out in your lifetime to add to your pension and other retirement provisions.
Warning – the meaning of ‘utmost good faith’
A life assurance policy is a contract of ‘the utmost good faith’ on both sides. This means that the assurer must have details that will enable it to assess the risks so that it can decide whether to issue a policy and at what premium.
Therefore, great care should be taken in answering questions, particularly about your health, or about proposals made to other assurers that might have been ‘loaded’ or otherwise had special terms imposed. If you have any doubt, answer ‘not to my know-ledge’ rather than ‘no’.
ENDOWMENT ASSURANCE AND PURE ENDOWMENT These two are related – one may provide a lump sum assured on death (or disability); the other provides a refund of premiums paid, together with some growth. Endowments provide capital sums of money at a specific date in the future or on death or disability prior to this date. Past performance of the major assurers shows that returns have more than matched inflation, with positive real growth without taxation. Life assurers are generally prohibited from selling policies with terms shorter than 5 years.
Pure endowment policies have become an important vehicle for investment. They do not depend on health and are not really life assurance in the true sense of the words. They rely on the investment expertise of the assurers and their economies of scale to show good performance.
When the policy matures, you may leave the capital sum with the assurer, pay nothing further and receive cash withdrawals by taking whatever growth has been achieved. These payments are tax-free as they are regarded as a part payment of the capital sum.
An endowment policy, with or without life cover, may be altered to:
Warning – Comparing policies for the best deal
Comparing the policies of different assurers is a monumental task that should not be undertaken lightly. Many relevant factors should be taken into account when making comparisons. These include:
Remember that past performance of an assurer is not a reliable indication of future performance – although it may be a useful guide.
When times are good in the investment market, assurers have been known to show phenomenal returns – well in excess of those from fixed interest investments, especially when you look at ‘new’ money, and not money that has been invested for some time. This could lead to a belief that such high growth rates can be compounded into the future, and produce magnificent maturity values.
In order to make realistic projections (bearing in mind that high inflation, a prime reason for the ‘growth’, may only be temporary), the Life Offices Association (loa) has a formula that prescribes the percentage used to illustrate the estimated maturity value. In terms of this formula, all assurers work on two different projection rates to illustrate the effect of different rates of return.
Any broker or agent who is a member of the loa and deviates from these figures either orally or in writing is acting improperly and could be prohibited from ‘selling’ assurance in the future.
Filling in the form
The proposal form for life assurance is an important legal document and, as with all contracts, the law generally assumes that you fully understand its contents once you have signed it.
Therefore, if there is anything you do not understand, it is important that you ask your broker or agent to explain it to you orally – and then to write it into the proposal form and keep a copy. If the explanation written on the form is incorrect, the assurer will inform you in writing; if you do not hear from the assurer, you can assume that what you were told is correct.
The most important point on the form is the one in which you warrant that the statements in the proposal form are true and correct. It does not matter whether or not the handwriting in the form is yours: it is the information that you give the assurer that is used to assess the risk and to form the basis of the contract.
The assurer will ask you, too, to acknowledge that any misstatements or omissions may lead to the contract being declared void, with all money paid being forfeited if the proposal makes allowance for this. Usually a breach of warranty entitles the assurer to reject a claim, whether the breach is material or not. It is therefore very important to disclose everything you know, and you should not allow the person filling in the form to disregard anything you tell him or her when you answer the questions.
Concealing anything material would entitle the assurer to cancel the policy and all benefits would be forfeited. The premiums already paid would also be forfeited (if this was stipulated in the policy). However, such a stipulation would be subject to the Conventional Penalties Act, 1962, which states that the penalty must not be out of proportion to the prejudice suffered by the assurer.
In order to be aware of the assurer’s undertaking, insist on being shown a specimen of the life assurance policy before you sign the proposal offered to you by the broker or agent.
Although you have nothing to fear in the document’s contents, there are a number of clauses – which are standard with practically every assurer – that need decoding from the specialised language of assurance. (Some assurers have, however, gone to great lengths to make the words comprehensible.) It is important that you understand the implications, for example, of the suicide clause, which exists for the first two years of the policy. Any reputable and knowledgeable agent or broker will be able to tell you what each clause means.
The assurer always needs to know about your habits and health. An exception sometimes exists in the mail order (or direct mail) selling of assurance, when the premiums may be higher than normal to cater for the increased risk involved in not asking too many questions.
Assurers may also ask you to take a medical examination, for which it will usually pay the fee – unless the probability of acceptance is very low (in which case the fee will have to be paid by you in advance). All assurers have a set of tables giving the maximum sum assured that will be accepted for groups of ages, with a personal statement of health the only requirement. The amount decreases with increasing age.
If your application for an assurance policy is declined, or accepted subject to special conditions or loaded (that is, accepted at higher than normal rates), your name is placed on the Life Offices Association (loa) register in code form, where this information is available to the underwriting departments of all member offices. This does not necessarily mean an automatic rejection or loading by the other assurers; it is merely a signal to exercise more caution than usual. Standards differ between assurers, for underwriting risks can never be regarded as an exact science; besides which, the medical condition giving rise to the loading might have improved or vanished in the interim.
Warning – Planning ahead to avoid death duties
It is always advisable to plan ahead so that if you should die, a minimum amount of your deceased estate will be paid out in taxes and estate duties.
This type of planning service is a specialised part of the assurance industry, though trust companies and financial institutions or attorneys can also be consulted. Because it involves tax planning, investment and containing and reducing estate duty liability, a good deal of background knowledge is essential. Firms undertaking such work (often for a fee, usually one per cent of the client’s gross assets) spend a lot of time keeping up with changes in legislation, investment rates, and opportunities. Qualifications are no guarantee of being up to date. A good starting point might be the Institute of Life and Pension Advisers (ilpa), Box 417, Johannesburg 2000, for a list of fellows.
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PREMIUMS Subject to a certain maximum, money paid for retirement annuities, a pension or benefit fund (other than a registered medical aid scheme) and employee’s contributions to an Unemployment Insurance Fund are deductible.
PROCEEDS With some exceptions, the proceeds of life assurance are not subject to income tax on maturity because they are normally regarded as capital and not revenue. Because of this, it is possible to keep ahead of inflation and not have your payout reduced by income tax.
The proceeds of company or employer owned policies can be taxed, subject to limitations contained in the Income Tax Act. Only an expert will understand the variations that are possible.
Special provisions in the Income Tax Act govern the taxation of lump-sum benefits received from retirement annuity, pension and provident funds.
ESTATE DUTY When a person dies, the proceeds of a life assurance policy are subject to exemptions.
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Additional benefits that can be added to most policies include:
5. Many assurers sell with complete flexibility, allowing the assured sum and the savings to be altered according to varying needs. When this type of policy was introduced in the early 1980s, it was marketed as an once-in-a-lifetime policy. Often, however, flexibility involves some financial sacrifice.
Assuring against disability
Another form of life assurance provides an income for a period of total disability after a waiting period.
Many employers have this assurance scheme as part of their group pension plans to ensure that they are not out of pocket through loss of income caused by extended illness or accident. It may be in place of – or in addition to – a group personal accident policy, which provides only limited payment for accident-related claims, and is also available from short-term insurers, which are generally quite separate from life assurers.
Permanent health insurance (phi or ‘noncan’, because it is not cancelable by the assurer) is available to anyone who is in good health and between the ages of 20 and 55. After a waiting period it will pay for claims arising for the period of disability or illness until the recipient reaches the age of 65.
Recurrent disability from the same cause is regarded as a continuation and the waiting period is waived.
A detailed proposal form covering health, occupation and hobbies must be completed for phi. If there is any impairment in health, assurers will tend to decline the proposal rather than exclude claims arising from a specific condition. However, policies may be sold with exclusions on hazardous pastimes, such as mountaineering and hang gliding. Assurers are usually reticent about accepting newly self-employed people who are not able to provide a suitable financial history.
There is a long list of exclusions contained in all disability cover. You should study these exclusion details carefully before signing the proposal form.
In terms of the Life Offices Association agreement between all South African assurers, the maximum disability benefit that will be paid from all assurers and insurers is your previous year’s earnings, with a maximum of your insured sum. There is, therefore, no point in over insuring. You must state all benefits, including those from clubs and associations on the proposal form – and remember, such statements constitute warranties; any misstatement therefore makes any resultant contract voidable.
Some phi policies offer the opportunity for increase, either with a guaranteed insurability option or with an annual inflation-related increase or both.
Ownership and cession
The proceeds of a policy will always be paid to the legal holder – the person entitled to decide who benefits by it. The Insurance Act refers to such a person as the owner in relation to the policy.
This ‘ownership’ can be changed either temporarily, or permanently, by cession. Although standard cession forms can be used to do this, it appears that they are not legally necessary. In fact, oral cession is just as suitable, though extremely difficult to substantiate. A written cession needs a revenue stamp, affixed by the cedent (the owner). The absence of a revenue stamp will not invalidate the cession, but will earn you a penalty of additional revenue for late payment.
If the cession is temporary (as security for a debt) and the debt is not paid, the temporary ‘owner’ (the cessionary) may surrender the policy, deduct the amount owing, and pay the balance to the original owner or his or her estate.
The assurer and assured can agree that the policy may not be ceded.
Remember, however, that when a policy is ceded as security, the assurer can become the debtor – and it would be difficult to deal with a stranger claiming payment if there was a dispute over health claims made on the proposal form by the original owner. For this and other reasons, policies ceded as collateral security are normally surrendered only as a last resort.
Similarly, a condition can be made when ceding a policy that it cannot be re-ceded. If, however, the cession is outright, all rights to ownership pass, and the new owner may handle the policy in any way, including surrendering, borrowing or re-ceding the policy to someone else.
Policies can also be ceded as a gift (in which case, donations tax may be payable in certain circumstances) or to avoid payment of estate duty on the death of the donor.
Policies are often ceded between intended spouses in an antenuptial contract (see marriage and property) to avoid estate duty or to prevent the policies from being the subject of a claim by creditors should one partner become insolvent or to provide the other spouse with general financial security. Such antenuptial agreements may include future policies still to be taken out.
The assurer must be informed about all cessions and their cancellation. You can do this by sending the policy, together with the deed of cession, to the assurer by registered post. All deeds of cession must be left attached to the policy even after they have been cancelled.
Warning – Complaints about life assurance
As most problems stem from a lack of understanding, ask your agent or broker (intermediary) for an explanation. If you are not satisfied, communicate in writing with the assurer’s branch office, setting out the details. After investigation, the matter will be referred back to the parties involved.
If the problem is not solved, write to the head office of the assurer for the attention of their ‘policyholder’s service’ department. Obtain the address from the branch office.
A letter to the Life Offices Association (PO Box 5023, Cape Town 8000) will achieve the same result, since the loa is not a party to the dispute and will merely refer the complaint to the head office of the assurer. In cases of a serious complaint, the ombudsman may be contacted (PO Box 4967, Cape Town 8000).
If satisfaction is still not obtained, and if the Insurance Act has been transgressed in some way, the Financial Services Board and Registrar of Financial Institutions should be informed, especially where coercive selling has taken place or you have been offered a share of the commission. The contact address is >PO Box 35655, Menlo Park 0102. Telephone: (012) 428-8000; fax (011) 45-4942; toll-free Consumer Helpline 0800-110443; e-mail firstname.lastname@example.org.
Naming a beneficiary To prevent your policy from becoming part of your deceased estate should you die, you can nominate one or more beneficiaries on a form supplied by the assurer or on the original proposal form. If you do this, the proceeds of your policy will still be subject to estate duty, if applicable, but will not be delayed through being routed through the estate. The person entitled to the benefit will be liable for the duty.
Although you will have no problem canceling or changing a beneficiary, your rights will be diminished by any loan owing on the policy. You may nominate anyone you wish to be a beneficiary, but generally it is unwise to nominate a minor child; it would be better to form a testamentary trust to act for the child. The beneficiary has no right to the policy until you die.
If the nomination of the beneficiary is irrevocable, you will generally have no right to change your nomination. For this reason it is advisable not to make such a nomination.
Paying a claim
All assurers undertake to pay legitimate claims and will do their best to settle as quickly as possible. All they usually require is the policy document itself and the original death certificate, though sometimes other forms (or certified copies of forms) are called for. A policy that has been lost must be replaced. An affidavit (sworn statement) of loss is required from the legal holder (or executor of the estate) and advertisements have to be placed in the government gazette and a newspaper. This takes about 12 weeks.
If death occurs fairly early in the life of the policy, the family doctor will be required to produce a certificate answering specific questions.
An assurer should, in theory, pay interest on money due under a life policy that is held by it from the date of death until it is paid. This seldom happens, however, except if the delay is the fault of the assurer, and then often only after a direct request for the payment of interest has been made. Some policies are worded so that the benefit is payable ‘whenever a death claim is admitted’.
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Most policies, with the exception of term assurance, grow in some way: either there are ‘reversionary’ bonuses – that is, bonuses that revert to the policyholder and cannot subsequently be taken away – distributed periodically (‘conventional’ policies) or policies where growth is derived from an investment pool (‘linked’ – or market-oriented – policies).
At one stage assurers sold ‘non-profit’ policies where the assured sum for a given payment was higher than that for a profit-sharing policy. Although these made sense before inflation became a major problem, today all policies should incorporate growth, and if you hold a non-profit policy you should consider changing it to a profit-sharing policy.
Another type of policy that has been discontinued is the one that paid out cash bonuses, which could either be accumulated at a comparatively low interest rate, paid out or invested in, say, unit trusts. Many people still hold such policies.
Most ‘linked’ – or market-oriented – policies have a distinct investment port-folio, where the policyholder’s funds are invested for growth of both interest and capital. A management fee is charged for this, varying from one assurer to another.
Another element of ‘profit’ exists – that of normal business gains derived from judicious management. The assurer invests funds to provide for future commitments and may obtain more than anticipated. Actuarial tables are used to establish what death claims will cost, and then ‘lives’ are selected by medical investigation. If this job is done well, fewer people than calculated die, giving the assurer extra profit.
Another obvious way of increasing profits is to keep expenses low. However, this form of growth is not always passed on to policyholders. Ask your agent or broker to give you more details.
Bregman Moodley Attorneys Inc. 2015/089214/21
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