Not only are the direct insurers more expensive than the traditional companies, but they are more expensive even at full commission and they claim to cut out all of that. Would love to hear an explanation from them on this. I think it might be bordering on misleading advertising.

There is only 1 direct insurer that really is cheaper but then you would not yet have heard of them because they have not yet spent millions on advertising – I guess that is why they are cheaper at this stage.

So for my money, if you want to go direct, then go to Instant Life, else use a broker – even at full commission you are better off (by far) than Outsurance or 1lifedirect.

Related posts:

1. Lies, damned lies and direct insurance!
2. DIY by all means, but…
3. Be wary of 1life direct’s advertising campaign…

As I have written many times before, go direct by all means, but don’t be naïve about it. Someone (that would be you) is paying for all the expensive advertising and infrastructure. If you are cynical about using a broker then do yourself a favour and get a quote from one of the direct insurers and then get a comparative “commission-free” quote from one of the “traditional” insurance companies. My experience has shown that the direct insurers are even more expensive than full-commission quotes and when we remove the commission from the quote, then they are stupidly more expensive. So much for saving by going direct and cutting out the middleman.

One of the direct insurers even offers a 30-day money back guarantee if you can find a cheaper premium on the same cover. Well here is a news-flash for them. I did a quote on their system and they can offer me R1million for R178 per month. A comparative commission free quote through a traditional insurer for the same cover is R1million is R150 per month (that’s almost 19% more). Interestingly, they have also increased the cost of their cover since I first did a quote. Guess I wont be using them then…

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1. 1 Life direct – misleading advertising & so expensive!
2. Be wary of 1life direct’s advertising campaign…
3. Sometimes cutting out the middleman just leaves a gaping hole!

According to the research there are about 12.4 million working South Africans and of these about 52000 are likely to become permanently disabled in the next year. 52000 – that’s 142 per day!!! That’s a lot of people. When you do the maths, however, it amounts to about 0.4% of the working population…so it is statistically unlikely to happen to you (thankfully). But what if it does?

And that’s the question that needs answering.

As the major breadwinner in our household, my disablement would be financially devastating and so that’s why I have insured the risk through some income replacement cover. This, in my opinion is the best way to cover this kind of risk (and the premium is tax deductible). But before you rush out and buy this cover first find out what cover you already have through your company retirement fund or through your existing policies and please don’t cancel any old cover before you have new cover in place.

As far as the death rates are concerned, about 3 times as many working South Africans will die in the next year (160000). Again, you need to consider the financial impact of this on your family and if necessary, you need to take out some more life cover. It is not expensive – but please, stay far away from 1lifedirect and Outsurance Life. I will write more about them next week but their products are exceptionally expensive – despite their advertising “no brokers” and “no commission”.

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1. Do I need a haircut?
2. Just a thumb-suck!
3. Lies, damned lies and direct insurance!

However, to my mind, doing your own financial planning could be likened to fixing the plumbing at home. Any one could do their own: get the instruction book, get the correct tools and parts and then spend the time fixing it. While this might provide an element of satisfaction to you, it could end up taking 2-3 times as long as it might the plumber (and lead to plenty of frustration and fowl language) and you might need to do it over because you did not do it right the first time. Or, you call the plumber. It is about the maths…you need to know how much your time is worth to you versus what it would cost the plumber. Either you spend the time fixing it or you call the plumber who will probably get it done right the first time in a fraction of the time and at a fraction of the cost.

And so it is with financial planning – you do it yourself or you can call the financial “plumber”.

Partly as a result of the DIY approach there has been a proliferation of “direct” insurance companies that have sprung up over the past years encouraging people to go direct, to cut out the middleman, to save on commissions and fees…and while this all sounds very attractive it is, in my experience, hardly ever true.

I wrote a while back about how expensive 1LifeDirect is compared to using a broker (http://www.thefinancialcoach.co.za/2010/03/18/1-life-direct-misleading-advertising-so-expensive/) and now it is the turn of new comer, OUTsurance Life.

I finally managed to get a quote from them after a few emails, a blog post about their poor service and then spending 40 mins on the phone with a very polite and friendly call centre agent. Towards the end of the conversation as he built up to the crescendo of his sales pitch he proudly announced to me that I was an “excellent” candidate for life cover with them and that as a result I would qualify for a very competitive premium. Bearing in mind that they have advertised that there was no advisor and therefore no commission on the policy I was expecting something quite attractive.

And here is the problem – it was R220 per month (almost 53%) more than a comparative quote through an insurance company (where the commision has been removed) and even with full commission on the comparative quote it was still 22% more (see below).

So let the old warning apply: Caveat emptor – or Let the buyer beware. By all means follow the DIY approach and go direct but beware – there are a lot of “lies, hype and spin” (also known as marketing) out there and just because it says there is no advisor and therefore promises to be cheaper, it does not necessarily mean that it is. My advice is this – rather find an advisor/planner who can supply you with the product you need without the commission costed into and and pay him/her a fee for the work that they do for you.

Comparative quotes from OUTsurance Life and Altrisk Insurance Company for a 43 year old male – R2million life & R300k dread disease cover:

OUTsurance (no commission): R644 pm

Altrisk (with commission): R529 pm

Altrisk (no commission): R422 pm

And on top of this, OUTsurance promised me an OUTbonus of about R3800 in 5 years time…attractive indeed but if you take the R220 that you would save by using the Altrisk product and saved it for 5 years (without any growth on it) you would have more than R13000 in 5 years time. Now that would be a BONUS!

Related posts:

1. OUT is not In!
2. Lies, damned lies and direct insurance!
3. The numbers dont lie…

“Thank you for requesting an insurance quote from OUTsurance! We are committed to AWESOME service and will do our best to quote a premium that really suits your pocket. One of our highly trained advisors will call you shortly to complete your quote. And just in case you had any doubts as to why we are the largest direct insurer, see attached a brief summary of our product features and service offering!

Regards, OUTsurance”

Despite the promise of AWESOME service I heard nothing for a week. And so I contacted them again and again I received an acknowledgement promising me that my request would be sent to the appropriate person for an immediate response. Still nothing…

And that is a problem with going direct (or cutting out the advisor) – there is no one to speak to, no one who is really interested and my “urgent” need for life cover has not been addressed.

Around the same time I was contacted by a client who was looking for life cover. He had heard that we charged a fee for the work we do, that we do not earn any commission and that as a result his premium would be significantly lower (up to 30% less).

After explaining to him how we worked he asked me to get some quotes for him and told us that it was urgent as he was going away on the 15th August for a month and wanted the cover in place before then. We duly sent him the quotes and then the relevant application form which he completed and sent back to us on Tues 10th August. The case was underwritten the same day, medicals were done the next day and the case was issued on Friday the 13th…now that is AWESOME service by the relevant insurance company (Altrisk, for the record).

If the client had gone “direct” he would still be waiting for someone to return his call…

And IF, OUTsurance ever get back to me, I will write a follow up post comparing their quote with what we can get elsewhere.

Related posts:

1. Lies, damned lies and direct insurance!
2. DIY by all means, but…
3. The numbers dont lie…

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):

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.

Related posts:

1. Commission free life cover…
2. It’s so easy to save money
3. Be wary of 1life direct’s advertising campaign…

• 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:

1. If she stays where she is and continues to receive 6% per annum for the next 15 years she could have ±R602000.
2. 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.
3. 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:

1. 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?
2. 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!

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1. Inappropriate advice?
2. It’s a (green) jungle out there
3. Contract save from Std Bank?

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.

Related posts:

1. Lies, damned lies and direct insurance!
2. Be wary of 1life direct’s advertising campaign…
3. Commission free life cover…

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.

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1. Where has all the commission gone?
2. 1 Life direct – misleading advertising & so expensive!
3. It’s so easy to save money

I just cant understand how in 2009, when research shows that the average person will change jobs at least half dozen times during their working career, that insurance companies still insist on locking people into long term contracts where there are significant penalties anytime that they want to change their minds (or their jobs for that matter).

Take the following examples into account.

An investor joins a company that does not have a pension fund and she decides to take out an RA. She has 2 choices here:

1. A unit trust based RA, or
2. The life insurance RA

In the UT RA, there is no contractual period, she can pay a premium for as long as she wants to and can change it as often as she wants/needs to as well. If she stops the debit order she can pick it up again at any stage – she will not have to make up the missed premiums. There are never any penalties on a unit trust RA – ever! Problem is that on the UT RA there is also very little commission and as such, most advisors who work on a commission basis and who have sale’s targets, will not even offer the client the choice of the UT RA.

On the life insurance RA, however, she will enter into a contractual relationship to pay a given premium for a given period of time, escalating (or not) at a given rate each year. At that stage, the insurance company will work out all their future profits and expenses on the policy (including the commission) and they will account for these right then and there and take these from her policy (in many instances they will also charge the client interest on these fees that they have taken from her policy). Now if she ever needs to change (decrease or stop) the premium because she has moved to a new company that has a pension fund or for any other reason, the insurance company will work out their losses as a result of her “breaking” the contract and they will claw them back from her fund value. Big penalties and through no fault of hers! By law this is currently limited to ±35% of the fund value and even though you may try to find out just how this is calculated you will probably never get an honest answer (believe me, I have tried many times).

The process of locking clients into long term contracts is archaic and given the high mobility and turnover of staff in today’s society, I also think that it is completely unethical. So spread the word, don’t ever buy a life insurance RA – there is a much better way! If your advisor is not telling you about unit trust based RA’s then ask him/her why not and possibly look to find a new advisor!

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1. Inappropriate advice?
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3. They prowl the empty streets at night…