Policy replacements are a big problem – one that is difficult to control, especially in terms of unnecessary replacements. In this article we’d like to give you more information about policy replacements: when they are necessary, when they are not and how to be more aware of the advice you receive.
Correct policy structure
The most important point to make is that if your policies are correctly structured right from the start, there are very few valid reasons to ever need to cancel and replace those policies. How do you know that your policies are properly structured? Here are a few key points to keep in mind:
- Your premium pattern is “level”, NOT age-rated, progressive or compulsory. Level is the most cost-effective long-term solution, allowing you to keep your cover in place for your whole life
- Your specific products are the most comprehensive ones available at the time of signing your quote
- Your specific products are structured as stand-alone benefits, not accelerated. For example, if you have death cover of R5 000 000 and accelerated disability cover of R4 000 000 and put in a disability claim, your life cover will decrease to R1 000 000. If your benefits were stand-alone benefits, however, you’d receive your R4 000 000 disability claim payout and you would still have R5 000 000 death cover in place.
If you’ve established that your existing policies comply with the above points and a broker approaches you with advice to cancel your policies and replace them with new ones you should be very cautious! Here are some tips to keep you safe from poor advice as well as red flags to look out for and when receiving advice – either from your existing broker or a new one.
Tip 1: Insist that the broker puts everything in writing
Always insist that a broker – whether it’s your existing broker or a new one – puts their advice in writing. They must give you the full details of why they believe your existing policies are wrong/bad, why the product they are proposing is better and how you will be benefited in the long-term by making the changes. Look out for notes made about the previous points mentioned in this article – namely premium pattern, how comprehensive the product is and whether benefits are accelerated or stand-alone.
As soon as you insist on receiving advice in writing you’ll notice that the broker either becomes defensive about it or gives you very vague information in writing. Remember, the policies you pay for are there for your benefit, you have a right to insist on seeing certain details in writing. If a broker does not want to provide you with advice in writing, you must proceed with caution!
Tip 2: Insist on receiving a copy of all quotes
This tip goes hand-in-hand with the above-mentioned tip – a broker who is trying to benefit his own pocket will often be less willing to provide you with full quotes and advice in writing. It is also important that whatever he has written in his advice letter is reflected in the quote – so once again, keep an eye open for premium patterns, the type of benefits and whether benefits are stand-alone or accelerated. Quotes don’t lie!
Red Flag 1: Your existing broker often recommends that you replace your existing policies (that he previously advised you to take!)
This is one we’re noticing more and more in the industry – brokers are advising clients to change their policies every 2 – 4 years. Some brokers move a client’s policies from one company to another, always claiming, “This company’s benefits are far better than the previous one!” or, instead of simply amending your existing policy, advise you to write a whole new policy with the very same company.
In instances like this always keep in mind: If this new company is suddenly better, then it means your broker did not do their job properly the previous time they recommended a new policy! If they did not properly compare all the companies’ benefits and premium options then how could they have promised to give you the best?
Red Flag 2: “I can offer you the same cover at a lower premium!”
Don’t fall for this one – many people have and are now knee-deep in regret. If someone offers you the same cover at a lower premium always insist on seeing the quote; we can guarantee that the only way anyone can offer you the same cover at lower premiums is if:
- They change your premium pattern to an age-rated/compulsory/progressive premium pattern
- This means that your premiums increase exponentially as you get older and very quickly become unaffordable. Most people end up cancelling their policies all together when this happens!
- They make your benefits accelerators to your death cover, meaning that any claim you put in will decrease your total death cover amount
- They offer you less comprehensive benefits than the ones you have
Red Flag 3: “Let’s cancel all your existing products and move them to one company”
This is most likely the biggest red flag of them all. In the industry we refer to this as “churning” – yes, it happens often enough that we’ve had to name it! There are brokers who are affiliated with only one company and profess that their company is the absolute best and all others are terrible. Bear in mind, if a broker agrees to only be affiliated with 1 company they earn 30% more commission than an independent broker that represents multiple insurance companies. That should already warn you of their intentions.
Furthermore, there is no single company that is superior to another across all of their products. Companies’ definition of critical illness differs, so some can be more comprehensive than others, while some companies specialize in fantastic income protection benefits, and so on.
Perhaps the most important thing to mention is that all retirement annuities are the same, irrespective of which company they’re with. There are brokers who will tell you to transfer your existing retirement annuity to their company because theirs is better – don’t be fooled. Sanlam’s retirement annuity is just as good as Momentum’s, is just as good as Old Mutual’s, is just as good as any other company you can think of. The only difference is which funds are available to you to choose from, in which case most companies offer many of the same fund choices (e.g.: Allan Gray Balanced Fund, Coronation Balanced Plus Fund, etc.).
It is also of utmost importance to remember that transferring a retirement annuity from one company to another incurs substantial penalties which you will not get back. Some penalties we have seen exceed R20 000 – money that you have invested and end up losing all together.
Red Flag 4: Cancelling your disability and critical illness benefits to upgrade to the latest version of the benefit
Doing this is not financially smart. The better option is to leave your current disability and critical illness benefits as they are and to take out additional cover on the newer version of the product. Remember, each year that you’re older you are a higher risk to insurance companies and therefore your premiums will be calculated at a higher rate each time you write a new policy. Often the “improvements” brought about in newer versions of benefits are minor and do not justify cancelling an old product to buy the new one. Think rather of spending the extra money you would have spent on the new benefit on increasing your existing cover amounts.
When is it acceptable to cancel old policies and put new ones in place?
Bearing all of the above in mind, there can be valid reasons for replacing old policies. The main reason you might be advised to replace a policy is if your old policy is structured completely wrong with age-rated/compulsory/progressive premium patterns, less comprehensive benefits and accelerated benefits. In this instance it is a broker’s responsibility to show youall alternative options, along with their advice, in writing and to leave the decision in your hands. Showing you the alternative options includes:
- Showing you the premium if you were to amend your existing policy to correct all the mistakes
- Showing you the premium if you were to take out a new policy with a different company according to the correct structure (to be shown for all companies that the broker is affiliated with)
In instances where an old/existing policy has been incorrectly structured it is possible that the correct structure with a different company may be more cost-effective and preferable. In many cases you might find that you are placing different benefits with different companies (e.g.: Death cover with Hollard, disability cover with Sanlam and critical illness with Momentum) in order to ensure that you are paying the best possible premium, receiving the most comprehensive benefit and – most importantly – that your future is protected.
Our offering to you
If you’ve recently received advice that you are unsure of, or have any questions about the information shared in this article you are welcome to contact us for assistance. We’ll be happy to help you, and will always do so by putting all our advice in writing for your peace of mind.