Beware of life insurance savings products!
I admit that this is written with a lot of emotion but there have got to be few things that are worse for investors than life insurance savings products. Whether they are endowment policies or retirement annuities (new age or traditional) they have got to be the worst thing that an investor can buy!
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:
- A unit trust based RA, or
- 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!