Beware of a Trojan horse

By Andró Griessel

Understand your premium patterns over time

People take out life insurance for various reasons. It varies from taking care of a family when the breadwinner passes away to covering debt, to buying out a co-shareholder, covering estate duty and even using it as an investment for the next generation.

Little attention is given to the insurance contract or the impact of premiums on your future finances. We are of the opinion that life insurance should be of a temporary nature, if possible, and your finances should be in place so that you can get rid of it, no later than at retirement.

Two letters that were recently sent to clients by two different insurers, confirms this view.

The first of the two letters is a standard one which would be familiar to many readers: The insurer regrets to inform the client that they can unfortunately not continue to give the client their benefits at existing terms and the premium would therefore have to increase or the cover will have to be decreased.

In this particular case, the client’s premium will increase by 67% in October this year.

The second letter still leaves me pondering. It came from a trendsetting, innovative player in the life insurance industry.

A few years ago, the company designed a product where you can pay an additional premium each month to make your life insurance paid up at age 65. It is like buying your house (in this case life insurance) compared to renting it.

At the time, when we had a look at the premium compared to the benefit, it looked too good to be true.

And you know what they say about what seems too good to be true…

Here it is also the case that the insurer “unfortunately cannot maintain the benefits at the current terms” and clients have the option to either increase the premium, decrease the cover or continue paying the premiums until age 70.

Why does this letter not make sense to me?

  • It was sent to clients via the post instead of via e-mail, as with all other communications.
  • The adviser/broker is not automatically included in the correspondence, and I came across this by accident. Of the 13 clients in our practice that these letters were sent to, none of them were aware of the letter and therefore none of them asked us for advice about the decision.  The company therefore exercised the default-option on behalf of the clients.
  • The clients were given three options, of which the default option (in other words the option that will be exercised on your behalf if you do not exercise any other option yourself) is not the best outcome in most of the cases, in my opinion. I suspect that more than 90% of everyone that this benefit was applicable to has however exercised this option, whether on purpose or not.
  • The options are presented in such a way that only the most detail-orientated and analytical client would have been able to make an informed decision.

In my opinion, the letter fails miserably in placing the client in a position to make an informed decision. But how important can the decision be?

See herewith a summary of a calculation for a specific client (52 years old), given certain assumptions.

In this case, the “cost” of option 1 (the default option) is almost double that of the “value” thereof if the assumptions that are being used are correct.

If the client was able to achieve an 11% return, the projected value would increase to R14.2 million. If the client lives until age 95 (as most people in this LSM group do), the projected value increases to R23.9 million.

A decision that is therefore being made per default on behalf of your family, could potentially become one worth millions, or in other words, one of the more important decisions in your life. It is surely not pedantic of a client to expect that this option should have been given the necessary attention.

In the example above, the following is not even considered:

  • The fact that the life premiums are being paid with after-tax money and that the money needed to pay for the additional premiums, should be even more; and
  • Estate duty of 20% or 25% could be payable if it is not bequeathed to a spouse, but rather to children or a trust.

For the client in the example, the true financial implications of this decision could be even larger. If you therefore have this specific product, contact your financial adviser urgently and find out how it affects you, because the default option is in my opinion far from the most suitable option for everyone.

Lessons to be learned

The above mentioned two letters to clients remind us of a few important principles when it comes to life insurance.

  • Current premiums, as well as premium- and cover increases are not guaranteed for life. Make sure you know how long your premiums are guaranteed for and assume that the escalation that is currently applicable (especially if it is relatively low) might not be the same forever.
  • Understand your premium pattern.

I often see people that are happy with the premium that they are currently paying for their cover, but that do not have an idea as to where the premiums are heading.

A simple calculation usually shows that these premiums are simply not sustainable. Something has got to give… and it will most certainly not be the insurer.

A quick calculation of the present value of your projected premiums over 20 years will give some perspective as to whether the cover will be sustainable.

  • Be wary of default options. Ask your adviser to analyze your options thoroughly and to provide you with advice given your specific circumstances.

Never forget that you are dealing with a company that has a profit goal. If you accept that they will at all times offer you the best option as the default option, you are simply being naïve.

For as long as you live, life insurance will be an expense, not an asset.

Make sure that you will be able to sustain premiums until the end, otherwise this so-called asset could be a Trojan horse full of sleeping soldiers that could come and wreck your retirement, one premium at a time.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth (Previously ProVérte Wealth and Risk Management). Contact him at

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.

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