A critical issue in the financial services industry is the large number of life insurance policies that are cancelled every year. Investors cancel policies for various reasons; however, such decisions are often not made in line with their own intentions but on the advice of unscrupulous advisors.
For instance, investors may have had particular policies recommended by their advisors that were inappropriate to their circumstances and have now become unaffordable.
Investors are often promised a better life insurance policy by their advisors, after which their old policies are cancelled and replaced.
The objective of replacing an existing life insurance policy should always be to improve your benefits while ensuring that the benefits remain cost effective.
Careful analysis must be conducted before replacing a policy. This is especially true of older policies that contain an insurance portion and investment portion. If you have a policy with an investment value and cancel before maturity, you may be penalised.
You also need to consider where your funds are invested. If they are invested in a smooth bonus or reversionary bonus portfolio, you may lose the guarantees on the capital and bonuses already vested.
Your financial planner should do a present costing analysis that takes into account the investment value of the old policy and discounts the future value of the premiums to the present value. This will allow you to compare the cumulative cost of the premiums of the new policy to the cumulative cost of the old policy (bearing in mind that the old policy has an investment component).
You should also compare the structure of the premiums. Older policies tend to have level premiums while new policies may be structured more aggressively. In this way, the premiums are cheaper in the early stages of the policy but become expensive later. It is also important to check the guarantee period of the new policy.
Investors also need to consider their state of health. Your health may have changed since the inception of the old life insurance policy. This may mean that the new policy will be subject to exclusions or loadings.
There is customised software that enables good financial planners to compare the benefits of two life insurance policies. This is particularly important when examining income protection, disability cover and critical illness cover benefits.
For income protection, your benefits should at least be the same. If benefits are exactly the same, the only consideration is the cost of the benefits. It is important to confirm with your advisor that the waiting period before benefits become payable is the same.
Unscrupulous advisors may increase the waiting period as this will make the premiums cheaper. But, should you have to claim, you will be obliged to wait longer before your claim is paid. This may have disastrous implications for your cashflow.
Always check that the new policy has cover escalation as well as claim escalation linked to inflation. If you do claim, at least your benefits will increase each year at the rate of inflation.
Disability benefits offered under new-generation life insurance polices are generally better than those offered under older policies. Old policies had capital disability cover while new policies have comprehensive capital disability cover.
Comprehensive capital disability covers you if you are unable to do your job if you become physically impaired. Impairment does not necessarily mean that you will be unable to do your job, and not being able to do your job does not mean that you are impaired. Comprehensive capital disability cover therefore gives you two possible grounds on which to claim.
You even have the option of nominating a specific occupation, which means that if you are disabled and can no longer function in your specific occupation you will receive a payout.
The life insurance company would not require you to retrain or perform a similar occupation.
Generally, critical illness cover, otherwise known as trauma cover benefits, are best left untouched.
New policies have stricter definitions of critical illness benefits than older policies.
The effect is that your chance of claiming on your critical illness cover becomes more remote, and the benefits, if you succeed in a claim, are restricted or reduced.
Apart from the fact that certain companies require you to inform them if you are leaving the country or about to start smoking, life cover is a fairly homogeneous benefit. The only real consideration when changing life cover is price.
If you are approached by another advisor (a salesperson) with a recommendation to replace an old policy, there are two critical steps you need to follow.
First, get the report from the other advisor in writing – not just the quote.
The report should include all the reasons for the replacement, including the shortcomings.
Second, inform your existing financial planner before making any decisions.
This will allow your current advisor to respond to the recommendations made by the other salesperson, and this will ensure that you really receive the best solution based on your individual circumstances.
Because of the comprehensive analysis required before you can be sure that a new policy is more to your advantage, the Life Officers’ Association has a replacement code which obliges your advisor to complete a replacement policy advice record.
This replacement policy advice record compares the old policy and the new policy to ensure that you understand the consequences of replacing the policy.
You are required to sign this record once it has been fully completed by the advisor.
If you have second thoughts about any policy into which you have entered, you have a cooling-off period of 30 days during which you can cancel the policy.
My advice is to engage an independent, fee-based CERTIFIED FINANCIAL PLANNER® professional who is focused on your best interests, who can provide unbiased impartial advice and is not merely aiming to sell you a product.
Visit the FPI’s website on www.fpi.co.za to select a qualified, CFP® professional.
Debbie Netto-Jonker CFP® is the founder of Netto Financial Services and was Financial Planner of the Year in 2001.
By Debbie Netto-Jonker CFP®
