CR215

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

Background

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.

Discussion

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.

Result

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.

SM
May 2007