Came across another case of what I think is one of the worst examples of “bad practice” in our industry…a retirement annuity through a life insurance company with a term beyond age 55 and with a 20% escalation on the premium. While I accept that the client may have needed to save for retirement, there is one reason and only one reason that the term was extended beyond 55 and the escalation was set at 20% – this policy was aimed at generating maximum commission for the sales person.
The initial premium was R1500 and over a 15 year term the 20% annual escalation means that the premium will effectively be doubling every 3.6 years. The final premium will be R19260pm. There is a more than reasonable chance that the client had no idea that this would be the case and that he will not be able to afford the premium in a few years’ time as it escalates way more quickly than his salary increases. As a result, he will be forced to make a change to the policy and will then incur a penalty (of up to 30%). In my opinion, this kind of business practice is immoral and if the industry was serious about cleaning up its image, it would have been banned ages ago.
A better way to do this RA would been to give it the shortest possible term (10 years) and then allow the client to open end it at that stage…or better still to have opted to use a unit trust RA (there were no index options around 10 years ago). But then the fees for the company and the commission for the agent would have been significantly less…but the client would have been better off by far!
And finally, the average annual return on this RA has been less than 7% pa so far…the “average” balanced unit trust has returned more than double this over the past 10 years at just under 15% pa…
Martin Luther was once asked by one of his parishioners (who was a cobbler) what he should do with the rest of his life and his reply was “make excellent shoes and sell them at fair prices”. This kind of RA is neither excellent nor is the price fair!
