Premiums paid to insurers, and commissions paid to providers have the biggest impact on your finances, they affect your cash flow on a monthly basis in most cases. Here's what to know before taking out your funeral plan.
Premium amounts must be clearly stipulated in your policy document, together with information on how long it is guaranteed. Also, if there is a stipulated increase in premium, when this will occur and by how much e.g. annual increase of 10%.
Premiums are normally required to be paid in advance. A policyholder is covered only for as long as premiums are being paid. This means that the moment a policyholder is in arrears with the payment of their premiums, their claim for payment may be resisted by the insurer, and their policy can lapse.
− do not put yourself in this situation, rather install a monthly debit order to avoid this bad practice (assuming you have a product that requires servicing monthly payments).
In terms of the Long-term Insurance Act, however, insured are granted a period of grace of 15 days to rectify any non-payments says the Ombud
"If your premium is not received within the 15-day grace period, there will be no cover for that month and the three-month waiting period, and six-month waiting period for additional members, will recommence. The premium amount will not be deducted from the claim amount and the claim will be rejected by the Underwriter." … funeral policy extract
If you pay via debit order check your bank statement or your salary slip for stop orders, every month to make sure that your insurance premium was paid. Remember that premium payments have to be paid in advance.
If you have missed a premium, contact your insurer immediately to make arrangements regarding your policy.
Often insurance products are sold by other providers on behalf of the insurer. These products can be branded in the name of whoever is selling the product.
These providers are then paid a commission for signing you up, on an on-going basis, by earning a portion of your on-going premium installment.
In a study on Funeral Insurance, done by the Ombudsman for Long-term Insurance, it was mentioned that "The main incentive for writing funeral policies as assistance business is the absence of a cap on commissions, which accordingly allows for the marketing of products which have relatively high administration costs and extended distribution chains."
This statement brings to light the fact that commissions can be very high, often negating any benefits to you the policyholder.
Thus you need to be absolutely certain that your policy has a fair commission and cost structure that you are comfortable with; otherwise it is best for you to find another provider!
Be careful with the amount of on-going commissions you are paying. There are some bad operators out there, so know what you are paying.
Commissions must not be crippling! They should be fair and a small percentage of your premium amount. If it is not, or you cannot get the breakdown, consider another more transparent and cost-effective product provider.
Analyse the breakdown of your monthly premium by finding it in your insurance contract. It is your right to get this information. Insist on it or do not accept the policy.
A typical commission and cost structure disclosure:
Risk premium: 70%
Admin / Policy Fee: 10%
As shown above, you need to know the commission and all other costs charged to your policy.
A policy certificate must be given to you the policyholder, with information about the person or persons who are covered in terms of the policy, the amount of cover, the net premium, the total amount to be paid out (cover) as well as a clear breakdown of the costs and the reasons for every one of those costs!
Another example of a transparent commission structure, stated in a funeral policy document:
Transparency is key when dealing with any provider. Are you getting all the information you are supposed to?
Here's a bad example of commissions that are crippling to a funeral policy:
Sum assured (Cover): R5,000
Monthly premium: R20, made up of the following:
Risk premium (to the insurer): R7.50
Admin/Policy Fee: R2.50
As seen above, the cover value is low, but so 'seems' the commission - in absolute terms only!
When you compare the commission relative to the premium it can be seen that it is R10 / R20, or a 50% commission being earned by the provider. This is unfair because the effort level required by the provider to earn that level of on-going commission is unjustifiable.
Secondly, if you think the insured is paying R20 monthly premium for R5,000 funeral benefit cover − think again! After the commission chunk and admin fees are deducted, they are actually only paying R7.50 to the insurer for the R5,000 cover.
If they went directly to the insurer they could easily get perhaps 50% to 100% more cover for their R20 monthly premium. Now that is real value for their hard-earned money!
If your commission percentage is not provided to you, compare your commission amount to your premium amount as done above - as well as to your level of cover, to see if it is actually worth taking out the policy in the long-run.
The above example doesn't advocate not taking out funeral policies from other providers; Funeral policy providers have a massive role to play in South Africa, in countering the persistent under-insurance in our country with very low levels of saving.
This makes insurance an important tool in financial planning to preserve savings. This article does however, advocate the need for consumers to know when they are being ripped off and how to avoid bad product providers in the funeral insurance business.
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