The Financial Coach™ - Managing people & their emotions around money » Insurance

Where has all the commission gone?

Gregg — Thu, 01 Jul 2010 07:23:23 +0000

About 5-6 years ago the Life Offices Association (now ASISA) made the claim that up to 35% of the cost of new business was due to the commission paid on the products (http://www.busrep.co.za/index.php?fArticleId=2627965&fSectionId=552&nld=2005-07-18&t=html&f=d) and that was one of the reasons life insurance products were “expensive” and heavy penalties were levied when these were cancelled before maturity.

As a fee-based financial planner it has always amazed me then that when we dont take commission on life insurance products we never see a 35% reduction in the cost of the cover. There is a reduction but it is nowhere near 35% and not all companies are equal either. So where is the commission going to?

Consider the following case:

R4million life cover for a male age 35 would cost ±R506 per month and the commission that the advisor would earn would be almost R7000. If the commission is removed from the policy (yes it can be done) the premium would reduce to ±R372 pm – that’s a saving of R134 per month (26%) for the duration of the policy. Over 5 years that means you would save at least R8040 in premiums. The question I have is why is it only 26% – where is the “other” 9%?

So I did a bit of comparing and it turns out that 26% is a really good reduction and that most of the insurance companies are only reducing the cost of the cover by 15-20% (see table below – these figures are based on quotes for life and disability cover on my own life):

Company	Std	No comm	% Diff
Liberty	R 997	R 801	20%
Discovery	R 862	R 732	15%
Myriad	R 985	R 822	17%
Sanlam	R 524	R 445	15%
Odyssey	R 778	R 631	19%
Altrisk	R 1 153	R 850	26%
OM	R 951	R 761	20%

From the table above it is pretty clear that none of the companies is giving the full 35% reduction that the LOA spoke about and many of the companies also appear to be “holding back” some of the commission that would have been paid (I can only guess where it is going).

In my experience, Altrisk, which has a 26% reduction, is consistently the best company when it comes to reducing the cost of the cover when the commission is removed (they also have a really simple but highly rated product).

So where to from here?

My advice to you is the next time you consider taking out some life insurance, ask your advisor what the premium would be if there was no commission on the policy and then ask him/her what fee they would charge you to do the business – you could end up saving quite a bit of money if you are prepared to pay a fee for the work that is done (typically we would charge between 2 and 3 hours for the implementation of a life policy). So on the above R4million example, you would pay a (maximum) fee of 3*R750 = R2250 to us (we allow our clients to pay this off over a few months if necessary) and you would have the lower premium for the life of the policy – this way you can also be satisfied that if the advisor recommends any additional benefits (such as disability or dread disease cover) they are not doing it to increase the premium and thus increase their commission – they are doing it because it is in your best interest. Under the commission model, the greater the premium, the greater the commission paid – whereas the premium has no bearing on the advisor’s earnings under a fee model.

A total rant!

Gregg — Tue, 11 May 2010 13:48:17 +0000

I need to get this off my chest (again)…been fighting with 3 of the bigger insurance companies re the level of disclosure on their products with respect to fees and more specifically the performance on their portfolios…

Suffice to say it is a futile exercise – it appears that even in this highly regulated environment that they can get away with complete nonsense when it comes to answering questions put to them .

There is such a huge discrepancy between the published returns on their portfolios and the actual returns experienced by investors that one can only deduce that this must be the costs of the products – and it is not a pretty deduction.

Anyone who puts money into any investment product with any insurance company needs their head read! You are being very foolish indeed – there is a better way with lower costs and no contractual obligation and no subsequent penalties for breaking that contract. Invest in unit trusts and/or exchange traded funds – low/no fees, complete transparency and no penalties – EVER!

Appropriate advice?

Gregg — Tue, 13 Apr 2010 13:50:54 +0000

Consider the following – what would you advise the client?

Client A took out an insurance based RA in 2003 (23 year term). She started a debit order of R450 pm (escalating at 10% pa).
The current fund value is R63500
The company claims a return of 11.8% pa on the funds but the maths shows that she has had about 6% per annum.
She now wants to move the RA to a unit trust RA (where there is no contractual obligation and no initial fees). This will be done via a Section 14 transfer and the company can (legally) penalise her 30% of her fund value if she moves.
Her R63500 will then reduce to R47000.
Should she go or should she stay? What is appropriate advice in the situation?

I have not been a fan of moving this kind of policy but a quick look at the maths reveals quite a lot and has got me questioning things:

If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
If she moves, incurs the penalty and invests the R47000 (no fees) but then gets a 10% return for the next 15 years she could have ±R802000.
That’s R200000 more inspite of a 30% penalty!

How could anyone not make a case that it is completely appropriate for the client to incur the penalty and move the funds elsewhere? I am pretty sure that as long as this is well documented and motivated, the FAIS Ombudsman would find no fault with this.

At issue for me are 2 things:

How can the insurance companies continue to claim performances on their portfolios which bear little or no resemblence to the reality on investor’s funds?
How can the industry still actively promote the continued selling of these awful contractual savings products, especially when there are substantially better products available. It is my contention that in years to come there will be a flood of complaints at the FAIS Ombudsman from people who have been sold these contractual RA’s instead of the cheaper and better unit trust alternate. There can be only one reason that they are still sold and that is commission!

Dilbert on Finance

Gregg — Thu, 08 Apr 2010 12:01:13 +0000

The Dilbert cartoonist, Scott Adams, earned a MBA from Berkeley, worked at a bank (got held up twice at gunpoint), and is worth millions. So we presume he knows a thing or two about money. In an interview with the Akron Beacon Journal, Adams says he read about a dozen personal finance books and began working on one himself. However, he found it all boiled down to these nine points and he “couldn’t figure out how to fluff it up.”

1. Make a will.

2. Pay off your credit cards.

3. Get term life insurance if you have a family to support.

4. Fund your 401(k) to the maximum.

5. Fund your IRA to the maximum.

6. Buy a house if you want to live in a house and can afford it.

7. Put six months expenses in a money market account.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

If we adapt these to South Africa they might read something like this:

1. Make a will (you are going to die one day and the consequences of not having one if you have beneficiaries is too great to contemplate).

2. Pay off your debt including your credit cards and home loan.

3. Get life insurance if there is financial risk at your death (i.e. you have a family to support or debts that need to be paid including estate duty).

4. Fund your pension fund to the maximum (that the company allows).

5. Fund your Retirement Annuity to the maximum (if you dont have a pension fund).

6. Buy a house if you want to live in a house and can afford it. I guess the same logic would apply to buying a car - if you can afford it.

7. Put six months expenses in a money market account (once you have paid off your debt).

8. Take whatever money is left over and invest 70% in an equity based unit trust or exchange traded fund (etf) and 30% in a bond fund or 100% into a balanced unit trust fund and never touch it until retirement. As South Africans, probably at least 20-30% of this should be offshore (i.e. out of SA).

9. If any of this confuses you, or you have something special going on (retirement, college planning, a tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.”

1 Life direct – misleading advertising & so expensive!

Gregg — Thu, 18 Mar 2010 19:01:50 +0000

Just saw the 1Lifedirect TV advert again this evening and it really gets my goat – their advert is so incrediblymisleading. It should come with a huge health warning similar to that on cigarette packets. They were offering a 44 year old male R1million life cover for just under R500 (if i remember correctly) and at the same time boasting about how cutting out the broker would save up to 22%.

While the 2nd part of the claim may be true, what is distressing is that I can buy R1million life cover through an insurance broker for about R190 per month. If I cut out the commission (broker) then that drops to about R144 per month which is less than 1/3 of what they claim to be able to offer without any commission on it.

What an unbelievable bunch of thieves! They are just like any of the other insurance companies in this country and on top of that, their claims to cut out the paper work could provide you with some very nasty surprises come claims stage.

Based on the quotes above, I would opt for the services of a broker every time – even at full commission.

This is just wrong!!!

Gregg — Tue, 18 Aug 2009 08:18:04 +0000

I came across a 76 year old lady this morning who was sold a 10 year endowment at the age of 71 (through Old Mutual Horizons) for R10000 per month (yes, ten thousand rand!). 5 years later her situation has changed, she cant afford the premium anymore and needs to make a change…surprise, surprise, she is going to receive huge penalties for doing this.

This is just wrong and I dont care how anyone might try to justify this, there is no reason that this should have happened and the company should never have accepted a 10 year term when a 5 year term would have achieved the same goal.

There is, unfortunately, only 1 reason that a 10 year term was taken – fees and commission. Under the “new” commission regulations (which are the only ones I can get to generate a quote) a 5 year term would earn the broker R28000 in commission and a 10 year term would generate R52800 in commission. The company admin fees would not be that different from these figures so it is not hard to see why the broker made the term 10 years and why the internal compliance officer at the company could not see any “issue” with the case. This is just theft! and it is the kind of thing that continues to give our industry a bad name.

If the term was 5 years she could have had access to her funds and could always extended the policy on an as-and-when basis…better still, she could have been in unit trusts where there are never any penalties (but the commission is much lower and takes longer to earn).

Stay away from insurance companies if you want to invest money!

Gregg

Be wary of 1life direct’s advertising campaign…

Gregg — Sat, 08 Aug 2009 12:01:49 +0000

Saw the TV advert for 1life direct recently…watch out, the cover they are offering is incredibly expensive. Far from cutting out the middle man and therefore being cheaper, it is significantly more expensive than you could get even if you went through a broker who was charging full commission.

For example: A quote from 1life direct (with no commission) is as follows:

Policy Information
Product:	1Life Elevated
Life Cover Amount:	R 1,000,000.00
Term of Policy:	Whole life

Total Monthly Premium	R 322.99

The same amount of cover through another insurance company, with full commission on it would cost me R183 per month. Far from being “22% cheaper by cutting out the middle man”, 1lifedirect is in fact about 77% more expensive. Now if we remove the commission from the quote then the premium for R1million life cover for me would be R138 per month and 1life direct are about 135% more expensive.

As I have said before, watch out for insurance companies and dont underestimate the value of good, independent financial advice.

That’s all for now

Gregg

Commission free life cover…

Gregg — Thu, 30 Jul 2009 08:45:47 +0000

As a follow up to the post on cutting out the middle man, I thought I would write about another case of “half-truths” from insurance companies.

About 6 years ago, I was at a financial planning conference where the issue of fees and commissions was being discussed by a panel. One of the panel members was representing the LOA (Life Offices Association, now ASISA) and he stated that about 35% of the cost of new business for life insurance companies was the cost of commission that they paid to advisors. This means for every R100 of premium, R35 was (according to the official industry association) a direct result of the commission that was paid to advisors.

Being the trusting type, I therefore assumed that if you remove the commission from the quote, there should be a reduction of ±35% in the cost of the cover. So for about 6 years now, we have been providing life cover for our clients without any commission on the policies*.

The problem is that in whole time that we have been providing commission free life insurance policies (yes it can be done), we have not yet seen a reduction even close to the supposed 35% that the LOA was touting, nor have we found anyone in the industry that has been willing or able to explain the reasons for the discrepancy.

For the record and in our experience, if we remove the commission from the life cover then there is a reduction of between 12 and 27% in the cost of the cover (depending on the insurer) this is clearly far short of the supposed 35% and some insurers are obviously creaming more for themselves than others.

In practise this means that if the cost of the cover (with full commission) would have been R1000 per month, by removing the commission from the policy, the premium could be reduced to ±R750 per month). Over a 10 year period that is a saving of at least R30000 in additional premiums. Makes you think, doesn’t it?

That’s all for now!

The Financial Coach™

*we do this by charging an hourly rate for work done in providing the cover – typically this is anything from 2-4 hours depending on the type of cover involved.

Sometimes cutting out the middleman just leaves a gaping hole!

Gregg — Mon, 27 Jul 2009 07:07:35 +0000

I recently received a marketing offer from 1lifedirect to take out some life cover directly through them, thereby cutting out the paperwork, expensive medicals, the broker and therefore the commission. All of this, they promised, would save me up to 22% on the premiums.

Having seen their rather funny TV adverts and being the curious sort I decided to give them a call to see if things were as good as they promised. After all, their flyer offered me R500000 life cover for only R140 per month (subject to certain terms and conditions of course).

On the face it of their offer sounds quite attractive – but on further investigation it is anything but so. Some comparative quotes to see what I could get elsewhere revealed that I could get R896000 life cover for R128 per month (with full commission on the policy). The same cover without any commission on the policy would cost just R100 per month – now that is a saving of 28% on the full commission quote and is over 50% less than the 1lifedirect quote. So there really is no saving of anything and in fact, sometimes cutting out the middleman could turn out to be quite a bit more expensive.

The 1lifedirect offer is not nearly as good as it initially seemed and far from it being a quick and convenient process they could not give me a quote over the phone because of the fact that I do the occasional scuba dive. The quote needed to be done by their actuaries…7 working days later and still no quote from them despite 2 follow up phone calls from me. By this stage, the average insurance broker would have had the case finalized and issued and I don’t even have a quote. Sometimes going direct is certainly not a quicker or more convenient process.

1lifedirect also say that they cut out the need for expensive medicals – for the record, most medicals are paid for by the insurance company concerned. This is certainly the case where the insurance company is the one that calls for the medicals. Sometimes going direct can mean that you stay ignorant of the facts.

1lifedirect also claim that they cut out the need for paperwork. Far from this being a pro it could turn out to be a real negative the next time you apply for insurance cover; no paper work means that you have no record of what you answered on the medical questions and no record of answers significantly increases the risk of accidental non-disclosure. As a consequence this significantly increases the risk of a claim being repudiated by the insurance company (because of the accidental non-disclosure).

So, far from being “life insurance that is quick and convenient, and that – by cutting out the broker – saves you money!” in my case, the offer by 1lifedirect turns out to be significantly more expensive, not so quick and also potentially increases the risks when applying for future insurance.

For the record, I have no problem with people going direct. To me it is much like fixing the toilet at home – I can do it but it will take time and effort and I might not have the necessary tools. Either I invest the time and energy or I pay a plumber to do it for me.

In the same way, if a broker can’t add value to the client and he/she knows what they want and has the time to do it then there is no reason that they should not go direct. They just need to be aware that it may not always be the best option and that while in some cases it may appear to be cheaper it could turn out to be a very costly exercise.

Sometimes cutting out the middle man just leaves a gaping hole.

That’s all for now.

It’s so easy to save money

admin — Fri, 20 Mar 2009 06:04:24 +0000

It’s so easy to save money!

One of the “compulsory” forms of insurance that people with bonds have to have is Home Owners Insurance – this is insurance that covers the cost of replacing the building if it is destroyed through things like fire and floods. Usually the bank that provides the bond also very kindly arranges this insurance and the unsuspecting home owner signs the policy document. There are at least 2 huge problems with this:

Firstly , while this form of insurance is compulsory for those with a bond (and probably advisable even if you don’t have a bond) the insurance companies that the banks use tend to be very uncompetitive. If you ask the company that covers you for all your other short term insurance such as your car and house contents for a quote on your home owners insurance there is a very good chance that you could see a ±20% reduction in the cost of the cover. In this instance it makes no sense not to move and consolidate the cover with all your other short term insurance (just make sure you are getting like-for-like cover). I have recently had 2 experiences where the premiums have been reduced from ±R460 to ±R290 per month and from ±R226 to ±R175 per month – this is a substantial saving and in the second example, the bank was prepared to reduce their premium to match the quote from the outside insurers. All it took was 2 phone calls.

The second big problem with the bank arranging the cover is that the premium usually comes off your bond account each month – this is a huge rip-off because you are effectively paying interest on this premium over the life of the bond. Even if you don’t change the insurance provider get the bank to take the premium of your everyday banking account as opposed to your bond account – without even doing anything else you will knock years off your bond term. If you do change cover, it is likely the bank will want an endorsement on the new short term insurance contract noting their interest in the insurance – this is pretty standard practice.

If you have concerns about your finances or financial positions, you should be speaking to your financial planner.