CR215 Costs – Complainant unhappy with return on his policies; alleging values diminished by surrender penalties


Costs – Complainant unhappy with return on his policies; alleging values diminished by surrender penalties


The complainant had taken out three endowment policies in the late 1970’s, and he surrendered them in 2003, receiving approximately R47 000 in total. He was unhappy with this return and felt that the money he had spent on the policies was money down the drain. He had recently become aware from the media of the controversy around surrender values, and although he did not know what penalties he might have incurred, he assumed that they must have been very large, “in order to cancel out decades of my premiums”. He asked us to investigate, as he felt he had been “done down”.

The insurer responded that when the policies were taken out expenses for commission, marketing, distribution and acquisition were incurred, and the expectation was that these would be recovered from the monthly policy fees over the expected terms of the policies, which were 33, 31 and 29 years respectively. When the policies were surrendered prematurely after, on average, 26 years, the insurer recovered the outstanding expenses that would no longer be recouped by deducting lump sums from the fund value of R1.14 for the one policy, R6.00 for the second, and R21.09 for the third. Thus the deductions had had virtually no “penalty” effect on the surrender values.


In an effort to delve further into an explanation for the values paid, we
asked the insurer to provide us with a schedule setting out the total amount of premiums paid and the amounts paid as surrender values, as well as an indication of what proportion of premiums were allocated to risk costs, and what growth was obtained on the policies. From the insurer’s reply it emerged that, over the three policies, the complainant had paid a total of about R13 000 in premiums, of which about R6000 had been allocated to investment, with most of the balance being used for life cover, (the sum assured at commencement was about R33 000). The total of the surrender values of the three policies was R47 600, and this reflected an average per annum growth rate on the investment portion of 13.4% over the entire life of the policies.


We advised the complainant that, contrary to his original impression, he had had guaranteed life cover and good investment returns on his policies. Recoupment of outstanding costs had had a negligible effect on his surrender values, as he had kept the policies for so long that all the costs had already been paid for. The complainant was satisfied with the explanation.

May 2007

CR201 Paid-up value – informed decision

• Paid-up value – informed decision

The complainant’s endowment policy, offering life and disability cover, had been in force for some 20 years when, in June 2003, he experienced financial difficulties. He telephoned the insurer’s call centre regarding his options. He was anxious to interrupt the payment of his premiums until his financial position had improved whereupon he intended to resume full payment. What he wanted, so he explained, was to make the policy “paid-up”.

According to him the call centre assured him that he would not have to repay the missed premiums but when, in October 2003, he applied to have the policy re-instated, he was advised that the premiums would have to be brought up to date. He reluctantly agreed that double premiums could be recovered for three months but having made that promise the insurer failed to deduct double premiums and only collected normal premiums as from November 2003. Furthermore, he received medical forms which he was requested to complete and when he queried it the insurer promised to get back to him, which never happened.

No premium was deducted in March 2004 and when he once again enquired about it he was informed that the money was in a “suspense account” and that the policy had not been re-instated. He clearly did not appreciate the full import of that information. The insurer then informed him that they were waiting for an HIV test. According to the complainant he had not previously been informed that one was needed. He nevertheless underwent the test on 1 April 2004. On 7 April 2004 he received further medical forms for completion. Once again he phoned the insurer to find out why this was needed. Once again nobody returned his call.

According to the insurer the complainant was advised in October 2003 that a full medical examination was required before the policy could be re-instated. Since all the requirements were not received they advised the complainant by fax on 14 November 2003 of the outstanding HIV test. On 29 March 2004 the complainant was again telephonically advised of the outstanding HIV test. This was provided by him on 5 April 2004. Meanwhile the declaration of health and medical information had become outdated. The insurer faxed the complainant another declaration of health on 7 April 2004, which they duly received on 16 April 2004.

The insurer was prepared to reinstate the life cover but not, because of the complainant’s deteriorating health, the capital sum disability cover.

According to the complainant the insurer, when he called the call centre in June 2003, never informed him that he would have to reimburse the missing premiums or that he would have to undergo further medical tests to reinstate the policy. Had he known that this was required, so he said, he would have found other means to keep the premiums up to date.


We requested and received a transcription of the telephonic discussion the complainant had with the call centre. The complainant clearly had not made a fully informed decision. The call centre brought him under the wrong impression that he could stop paying premiums for a few months and then resume payment without any adverse consequences. This is what he understood “paid-up” to mean and on that basis his belief was not unreasonable.

We held, first, that the policy had to be fully reinstated with both life and disability cover against payment of all arrear premiums and, secondly, that the insurer was not entitled to updated medical reports.


The complainant paid the arrear premiums and the policy was duly and fully re-instated. Because of the satisfactory result and notwithstanding the unsatisfactory service no compensatory award was made.

November 2006

CR202 Payment – paid-up policies


Payment – paid-up policies – insurer failing to implement premium escalation by increasing annual debit order amount as specified in the contracts – policies falling into arrears and becoming paid-up – complainant unhappy with resultant maturity values.


The complainant’s husband died in 1994. At the instigation of his employers and their broker, the death benefit from his pension fund (in the amount of R227 400) was used to purchase five policies from the insurer in the name of the couple’s youngest son, who was at that stage 14 years old. All the policies incepted on 1 February 1995. The plan was that the first policy would be the “bronpolis” (“source policy”), a voluntary annuity with a ten year term, which would generate enough income to pay the premiums on the other four endowment policies. These four policies would mature on 1 February 2000, 2002, 2004 and 2005 respectively. According to the complainant the broker indicated that her son could expect payment of R1,2 million by the end of the ten years. She did not tell her son about the policies until he was 21.

The insurer paid a monthly amount in respect of the annuity policy into the complainant’s bank account (commencing at R2 630 with a 10% p.a. escalation). The amounts necessary to pay the premiums on the four policies were simultaneously drawn from the account by debit order. The complainant knew that she could make use of the favourable difference between the amounts paid in and the amounts paid out. She stated that she did not know what the amounts of the premiums were but noticed that both the amounts paid in and the amounts paid out in respect of premium payments increased annually.

In 2000 the first endowment policy paid out only the amount of R12 625 plus R565 as late payment interest. The complainant accepted the maturity value, although she stated that it seemed suspiciously low to her. When the second endowment policy matured in 2002 she felt that the maturity value was so pathetic that she refused to accept it. The same happened on the maturity of the third endowment policy in 2004, and these two amounts were simply left with the insurer. In 2005 the last endowment policy matured and her son, who was by then a major, accepted payment of the value in the amount of R342 984.

It was thus the second and third policies that were at issue. The broker had had a protracted correspondence with the insurer over the years regarding various irregularities before he apparently gave up.

The two policies were identical apart from the maturity dates. A 10% p.a. escalation in premiums had been selected. The problem was that the insurer’s systems failed to ensure the deduction of the escalated premiums, as a result of which a constant premium of R200 per month was paid on each policy throughout the respective terms. This resulted in both policies going into arrears and being made paid-up on 1 February 2001. (Premium escalations had also been selected on the other two policies. The difference was that the escalations on the fourth policy were properly executed, and when the insurer itself noticed that escalations had not been executed on the first policy, it caused the premium escalation to be cancelled from inception so that that policy did not fall into arrears.)

In 2001 the insurer offered the following reinstatement options to the broker:

• restore the premium escalations retrospectively with the client paying 50% of the difference in the increased premiums and the insurer the other 50%; or

• cancel the premium escalations and reinstate the policies with a constant premium of R200, as the credit on each policy was sufficient to cover the arrear premiums.

The broker rejected the first option on his client’s behalf on the grounds that the policyholder was not at fault and did not have the money to pay the arrears. He insisted on a complete reinstatement including the annual escalations, with arrears to be paid in full by the insurer. The second option was not pursued. The dispute lingered on, with the now grown-up son also getting involved and the complainant eventually lodging a complaint with us.

A letter from the insurer in 2003 admitted that the fault lay with it. The writer failed to explain why the insurer had unilaterally cancelled the escalation on the first policy (so that it would not fall into arrears), but had done nothing about the other two, which then became paid-up.

In our view the insurer was liable on grounds of breach of contract. It had failed to implement the contractually provided for premium escalations. As a result the annuity policy paid over too little money each month to the two policies and they fell into arrears; they were then made paid-up and the resultant maturity values were much lower than they should have been.

We asked the insurer to reconstruct the values as if the premium escalations had been cancelled from inception, the policies had not been made paid-up (and thus no paid-up costs deductions were made), the credit was used to bring the policies up to date and the policies thereafter continued after the maturity dates with the addition of growth.


The calculations indicated that the policy which matured on 1 February 2002 with a value of R14 868 would on the reconstructed basis have had a maturity value of R23 673, and by March 2006 this would have grown to R38 707. The policy which matured on 1 February 2004 with a maturity value of R15 823 would on the reconstructed basis have had a maturity value of R28 444, and by March 2006 this would have grown to R46 887.

We made a provisional ruling ordering payment of these amounts. No further submissions were received from the insurer, and the ruling became final.

November 2006

CR65 Costs – alleged failure of broker to explain costs and commission structure


Costs – alleged failure of broker to explain costs and commission structure – whether deductions on calculation of surrender value authorised by policy – error in calculation of surrender value uncovered.


The complainant applied through a broker for an endowment policy whereby he would contribute a fixed amount per month for ten years. Two years later he cancelled the policy, having by that stage paid R20 400.00 in premiums. He maintained in his complaint that he had not been advised of the costs structure or commission at the time of application, and that he had assumed that there were no costs or commission payable by him as he was a bank customer. He stated that after signing the application he received certain documentation, which he failed to understand. He was unhappy with the surrender (cancellation) value of some R9 600 he had received and with the insurer’s calculation of this value, which mentioned deductions for costs; furthermore he alleged that the commission amount deducted did not tally with the amount set out in the policy.

The broker (which is a member of our scheme) replied that all the features of the investment had been explained to the complainant prior to signing of the application form, and that a product illustration had been discussed with the complainant. A copy of this product illustration provided to our office indicated that there was full disclosure of costs, being a monthly premium fee and policy fee against the contribution (in rand amounts), an asset management fee (with a given percentage), and a fund administration fee depending on the size of the investment (with a scale of percentages for different rand amounts). It was stated that the insurer would pay commission for advice and services rendered in arranging the product to the policyholder’s financial adviser (the broker). This would be a fixed monthly commission for the first year, and a reduced monthly commission (rand amounts provided) for the second year. It was stated that “Commission is usually paid annually in advance. The aggregate of these payments, together with interest (currently 12%) will be recouped over the term of this contract by canceling units in the relevant investment funds on a monthly basis, ie it is amortised over the term of the contract”. Illustrative values on a 6% and 12% inflation scenario were set out in a table, as well as illustrative cancellation values.

In reply the complainant reiterated that he had never seen the product illustration. Further, he maintained that his policy only mentioned first year commission. He remained unhappy with the calculation of surrender value.

We obtained a fuller response from the insurer on these aspects, wherein the insurer pointed out that the costs and commission were also set out clearly in the policy, and that the complainant had not questioned these parts of the policy at the outset. The insurer had its actuaries re-examine the surrender value and an error in the calculation was uncovered, in that less commission had been paid to the broker than was deducted in the surrender value calculation; thus the complainant had been underpaid by some R2000. This amount was paid into the complainant’s bank account. The insurer conceded that the policy did not provide for second year commission, apologised, and stated that it had opened an inquiry as to why only the first year commission was shown in the policy and not the full amount due to the broker. However, it was pointed out that in this particular case the renewal commission played no part in the calculation of the surrender value as the second year commission was completely recovered from the broker, and was deducted from the outstanding costs.


There was clearly a dispute of fact between the complainant and the broker as to whether the broker had explained the costs structure and commission payable. This dispute of fact had to be addressed on a balance of probabilities and with due regard to the incidence of the onus. As the person lodging the complaint the onus rested on the complainant.

The copy of the product illustration indicated that it had been specifically prepared for the complainant in his name and with his details. Signing of this document was optional and it had not in fact been signed by the complainant, but he had signed both the application and a mandate, which acknowledged that his needs had been analysed by the broker and that the pros and cons of the product had been explained to him. It was difficult to resolve the dispute of fact but it appeared unlikely to us that such a document would have been prepared for the complainant and not shown to him; furthermore he did sign the mandate in the terms mentioned above and thus the probabilities favoured the broker’s version that he showed the complainant the product illustration material, in the course of explaining the investment to him.

The policy document was sent to the complainant together with a statutory notice informing him of his right to cancel the transaction within 30 days (the “cooling off” period), and an insurer’s certificate. These documents were apparently the documents which the complainant failed to understand. At the outset of the policy he contacted the insurer to change the commencement date and this was reflected by an endorsement sent to him; however he did not raise any other aspects with which he might not have been satisfied.

Set out in the contract document under the section headed “Wat kos die belegging?” are full details and descriptions of the charges, comprising a fee on the recurring contributions, the administrative fees, the asset management fees (“bestuursfooi”) and the upfront commission amount paid to the broker with recovery from the policyholder by means of the commission loan payments. It appears that the amount of the commission was incorrectly stated (this is addressed below). The contract also states, in the section “Kan u geld onttrek voor die realisasiedatum?”, that should the policyholder cancel the investment, any costs not yet recovered and any debt on the contract will be deducted to calculate the cancellation value, and illustrative cancellation values at different dates are provided. It is also provided that there will be a penalty cost if the contract is cancelled. In our view there was thus clear disclosure of the costs in the contract, even if the complainant had not received the product illustration. Since he was informed of the costs by the insurer and did not raise any questions about the costs, either with the broker or with the insurer, it must be assumed that he accepted the cost structure.

We were therefore unable to make any finding against the broker or the insurer with regard to the alleged failure to inform the complainant of costs. On a balance of probabilities it appears that he was properly informed of the costs of the investment.

In our view the insurer had provided a reasonable explanation as to how the surrender value was calculated. It was clear from the performance information and graphs provided that the performance of the fund had been disappointing, due largely to the strengthening of the rand in the period after the investment was made, which wiped out the actual growth achieved on the offshore markets. This provided some explanation as to the reduction in investment value as compared to the amount of contributions paid. The insurer had also provided an explanation as to the commission, and in re-examining the surrender value they had detected an error, in that the deduction for commission had been overstated. This error was rectified, and the amount refunded to the complainant. The insurer also apologised for the fact that the second year commission was not disclosed in the contract, but as they pointed out the effect of this amount had been removed from the calculation of the surrender value in the complainant’s case.

As clearly set out in the contract in the section on costs, commission is paid up-front to the financial adviser, and this amount is recovered over time on a monthly basis as a commission loan payment from the policyholder’s contributions. The insurer had provided a calculation setting out the commission account build-up.

Furthermore the contract also sets out cancellation provisions to the effect that in the calculation of the cancellation value the insurer will deduct any expenses not yet recouped and any outstanding debt, as well as a cancellation fee. The cancellation calculation provided by the insurer indicates that from the fund value of R16 705.79, deductions of R10 138.15 (in respect of commission not yet recouped) and R500 (cancellation fee) were deducted. No other cost items were deducted. 50% of the first year commission and 100% of the second year commission, amounting to R6 298.50, was “clawed back” (recovered) from the broker, and 80% of this amount was added back to the complainant’s value, giving him a cancellation value of R11 106.44.

The complainant was copied with all the correspondence, documentation and calculations received from the insurer and invited to comment. He did not do so.


A preliminary ruling against the complainant was issued, wherein we stated our conclusion that he had been properly informed of the costs on this contract. In the course of investigating the complaint the insurer had uncovered an error in the complainant’s favour in their calculations and had compensated him for this error. We pointed out that while the insurer’s explanation of the calculation of the surrender value was initially not fully detailed, he had now been provided with a full explanation including detailed calculations. It appeared that no unauthorised costs had been deducted. We invited the complainant to provide us with any further comment and/or information which might cast a different light on matters but he did not do so and the case was closed.

October 2005

CR62 RA policy made paid-up – costs deducted


RA policy made paid-up – costs deducted


In this case the policyholder took out a retirement annuity policy in August 2000 with a premium of R1 546,00. The deduction of a marketing and administration charge on this monthly amount came to R974,00 per month i.e. 63% of the recurring premium during the first 2 years. This was disclosed in the documentation provided to the policyholder at inception. When the policyholder changed occupation and joined his new employer’s provident fund he wished to reduce the amount that he contributed to the retirement annuity to R150,00 per month. The charges reduced to R98,00 per month and after a period of two years to R3,09 per month. When the complainant sought to make the policy paid-up the paid-up value of the policy after four years and two months came to R8 926 after the complainant had paid R34 360 in premiums. (There was no recoupment of costs at that stage.)


These figures once again demonstrate the effect of the upfront costs which the insurers incur in setting up policies, due not only to internal costs but, also to the commission which they pay to intermediaries. Although the policyholder was understandably outraged at the extent of the costs, this office could not assist in the matter as the charges were deducted in terms of the provisions of the policy documentation.


The complaint could not be upheld.

October 2005

CR63 RA policies made paid-up – costs deducted


RA policies made paid-up – costs deducted


The complainant took out 2 RA policies in February 2000 with a term for 25 years. In November 2002 he needed more life cover. He instructed his broker to obtain a quote from the insurer. The answer from the insurer confused him i.e. that his wish to increase his cover was regarded as a change to the contract and therefore he would be penalised. The insurer could not tell him by how much he would be penalised. He then wanted to know the actual cost of his existing life cover. He struggled to obtain an answer. The more questions he asked the more mistakes were made. The result was that the complainant decided to discontinue premiums while he sorted matters out.

He had at that stage paid R183 206 in premiums. The insurer made the policy paid-up and advised him that the paid-up value was R43 577. The complainant then lodged a complaint with our office because of the low value. The insurer advised that in making the policy paid-up it had deducted all unrecouped expenses. Part of the premium had been used for risk cover.


We had meetings with the insurer and the complainant. The insurer tried to convince the complainant to continue with his policies but after the poor service he received he was understandably reluctant to do so. The insurer eventually settled the matter on the basis of writing back all the unrecouped expenses, which by that stage amounted to R105 048, and making the policies paid-up.


The complainant accepted this settlement.

October 2005