Changes to cashing in life policies
The Life Offices' Association has welcomed the release of the draft regulations on commission and early termination values of policies. But it said that the life industry needs time to study it.
The regulation, which the association (LOA) described as a somewhat fair balance, is expected to form part of the Long-term Insurance Act once it is gazetted.
LOA Chief executive Gerhard Joubert said: "We believe that the new commission model is fair to the intermediary, while at the same time ensuring the sustainability of the life industry, and above all, ensuring that policyholders receive a fair deal."
The regulations recommend that half of the commission due to the intermediary be paid up front, while the other half be paid over the term of the policy to encourage ongoing service.
This means that intermediaries will receive a maximum commission of 5percent on endowment and retirement annuity (RA) fund policy premiums, split into a 2,5percent up front component and a 2,5percent ongoing service commission, payable monthly.
Currently all commission is paid to intermediaries at the beginning of the first and second policy years.
The up front commission portion will be discounted by 6percent since the time value of the commission that is paid in advance should be equivalent to that of ongoing commission. Discounting is the reverse of compounding and is used to determine the present value of a future value by deducting interest.
On early termination the draft recommends a 15percent maximum reduction in fund values for endowments that are paid-up or surrendered and for RAs that are paid-up or transferred.