Life insurance: Advisers get less

The structures apply to endowment policies and retirement annuities, but not to life or disability policies with risk cover.

The new structures were recently published in the Government Gazette after the National Treasury presented a white paper in 2006.

Concern was expressed about the high commissions that financial advisers received, even after a policy had been surrendered or it had lapsed. The new regulations come into effect on January 1 2009.

Under the provisions of the Long-Term Insurance Act an adviser is entitled to only half of the initial commission when a policy is sold, while the rest is paid out over the full term. This is done to ensure ongoing advice.

Currently all commission is paid out in the first and second year of the term of the policy. The maximum commission is 5%, which is divided into an initial commission of 2.5% and a further ongoing 2.5%.

Gerhard Joubert, chief executive of the Life Offices Association, says the new regulation creates a healthy balance. "We believe this is fair for policyholders as well as the industry."

New regulations also apply to the early surrender or lapsing of a policy when a client ceases to pay the premiums. The maximum permissible reduction in the value of a policy before the recent amendment was 15% of its value.

Important role

Now this percentage has to be reduced every year that a policy is in force, until an early cancellation fee ceases to be applicable.

The financial value of policies with a five or 10-year term may not be reduced if the policy has been in place for more than five years. If the term of the policy is more than 10 years, the value can be reduced only if it is surrendered before the 10 years are up.

Joubert says that in practice this means that investors will get back at least 85% of the value of their policies. As things currently stand, a policyholder can expect about 70%.

The new regulations largely allay advisers' fear that they will forfeit commission income. At present, for the first two years an adviser can earn commission of R3 600 on a retirement annuity of R500/month over 15 years.

In terms of the new regulations, commission would amount to R3 754, as long as advice continues over the term. Should the policy come to an end within two years, the commission would be only R1 654.

Peter de Beyer, managing director of customer solutions at Old Mutual, says the company is busy finalising changes to its commission structures in anticipation of the introduction of the amendments to the Act.

He expects that financial advisers will still play an important role in providing clients with advice.

"It's clear that we are moving away from an environment of mainly initial commissions to one of lower initial commissions, with commission being earned as and when advice is given."

- Fin24.com