|
Category:
Insurance
News /
Life
Insurance /
September 2007
Reviewing Life Assurance Policies
When and How?
Reassessing one’s life assurance and investment portfolio to ensure
its adequacy for current and future financial needs is an exercise
that should probably be undertaken every two years says Raymond
Byrne, CEO of the Association of Professional Financial Planners (Luasa).
“Reviewing one’s existing life cover may lead to the identification
of policies that are no longer adequate or which should be enhanced
or even replaced by a more suitable option. Economic and lifestyle
changes, career choices and maturation in age often prompt
individuals to reassess their policy portfolios,”says Byrne.
“But whatever the motivation, it’s important for existing and
potential policyholders to purchase products that are in their best
interests and to do so, consumers need to make informed, educated
decisions.”
The
option to update one’s current portfolio is also often prompted by
advertising or a direct approach from a financial services
intermediary – be it via a long-standing appointed broker or cold
call.
But
before consumers decide to opt for a new life policy, Byrne strongly
recommends that they ask two key questions, namely: “Does the
recommended product truly address my needs?” and, if the approach is
from a new or ‘unknown’ broker: “Why is the broker recommending this
product? Is it purely a fresh sale or is this really the right
policy for me?”
However, possibly the most important factor in the review process
relates to how consumers should go about assessing the suitability
of a product – especially if they intend replacing an existing
policy.
In
these instances, Byrne’s advice is to ask lots of questions and bear
the following in mind:
-
Most older life assurance policies are likely to include an
investment component whereas many modern policies don’t. Simply
put, this means that premiums for the same amount of cover under
a modern policy may be cheaper than under an older one. This is
usually the reason why an old policy is cancelled and replaced
with a newer option. The investment portion of an old policy
(often called the cash or surrender value) is paid out to the
policyholder when s/he cancels the policy. The amount paid is
usually much less that the total value of all the premiums paid
during the term of the policy, as most of these premiums were
used to pay for the life cover – the main reason the policy was
taken out in the first place.
-
Many older policies include a premium guarantee option which
means that the premium will not escalate throughout the term of
the policy. However, consumers should be aware that modern
policies have a defined guarantee period (this is always stated
in the quotation), after which the premium will be reviewed.
This review could result in a substantial increase in the
premium depending on the individual insurer’s mortality
experience. In other words, the insurance company’s experience
with death claims over the past few years will influence the
future monthly premium payment. If the number of death claim
pay-outs is more than the insurer had envisaged, the likelihood
of the premium being increased at the end of the premium period
is greater. If this is not the case, then the premium will
probably remain unchanged. So, premiums that are lower initially
may not remain so for the full term of the policy!
-
All life policies have a two-year suicide clause which is
generally not transferable. This clause automatically kicks in
at the start of every new policy.
-
The inevitable changes over the passage of time may mean that
one’s risk profile is very different now when compared with the
period in which the original policy was purchased. For example,
an individual may have been a smoker back then and has
subsequently kicked the habit (good for both health and risk
cover status!). Or a medical condition may have developed in the
interim. These differences must be taken into account when
comparing products and before a decision is made to change a
policy. Consumers should remember to bring their brokers up to
speed and disclose any lifestyle or health change before
obtaining other quotes.
-
Consumers should carefully evaluate the benefits of any new
policy, particularly the conditions and definitions of the
disability and dread disease cover offered. There is currently
no standardisation in the terminology used in these policies
(although this will hopefully change in future) and the level of
cover offered for various medical conditions by the average
policy may also have changed over time – so one must make sure
that s/he is comparing apples with apples. Moreover, today’s
policies tend to include a sliding pay-out scale, based on the
severity of disability or type of disease. To ensure that a
replacement product is, in fact, better than an existing policy,
consumers should make a point of pressing their brokers for the
finer details or they could land up short-changing themselves!
“When it comes to risk products, there is often good cause to
replace a policy,” observes Byrne. “If this is the case,
policyholders must remember that the primary reason for purchasing a
new product is for the benefits it offers, so if these benefits are
absent or if they don’t cater to an individual’s specific needs,
they must not buy the policy.”
In
the event that one does decide to buy a replacement life assurance
policy, Luasa urges consumers to ensure that they take the following
steps:
-
Be sure to read through the broker’s letter of credentials and
details of his licence (ask for two or three client references
if he/she is not your usual broker);
-
A
replacement policy advice record must be completed;
-
The quote should be carefully checked as all administration and
commission fees must be clearly reflected and explained by the
broker; and
-
Before cancelling an existing policy, make sure that an
application for the new product has been accepted by the life
assurer; that the first premium has been paid; and that the
cover for the new policy has been granted (or consumers may just
find themselves uninsured).
“If
an individual deems it necessary to change a policy, it would
probably be advisable to have a full financial needs analysis
performed on the entire portfolio,” concludes Byrne.
“A
two-yearly review of life assurance, medical insurance,
investments, retirement and estate planning will help ensure that
individuals have made adequate provision and have all their
proverbial ducks in a row.”
Source: ITInews – Insurance
Times and Investments Online
www.itinews.co.za
 |
