A better way to complain about life assurance penalties
There were 98 complaints to the Ombudsman for Long-term Insurance, Judge Brian Galgut, last year about reduced values that were paid out by life assurance companies when policyholders either surrendered their policies or made them paid-up before the contract term had expired.
Of these complaints, only 18 percent were decided partially or fully in favour of the policyholders. The main reasons the awards were made in favour of the complainants were:
* Calculation errors, which resulted in an underpayment to the policyholder. The amounts involved ranged from about R1 000 to R30 000. In most cases, additional compensation was also paid for poor service.
* Incorrect information had been provided in the surrender quotations, and the assurer decided to honour the quotation even though it was higher than the actual value.
* Premiums continued to be deducted after the policy had been surrendered, and they were refunded.
* Payment delays.
I am not sure how many complaints are made to the Pension Funds Adjudicator (PFA) every year about reduced payouts on life assurance retirement annuities (RAs), but I suspect they are considerably more those sent to the life assurance ombudsman. There are a number of reasons for this, mainly that life assurance RAs are sold for longer contractual terms, normally at least until the age of 55 (although there is no sound reason for this).
Personal Finance receives a steady stream of complaints about the confiscatory penalties that life assurance companies levy when, before the maturity date, you want or need to reduce the premiums or contributions you pay on their savings or investment products.
As I have said before, these confiscatory penalties can be levied even when it is not your fault that you cannot maintain the payments. You may have been retrenched, or have been injured or have contracted a serious disease and are unable to work. The life companies do not care a hoot – they will clobber you anyway.
And then there are people who are self-employed or who work for companies that do not sponsor a retirement fund and who take out an inflexible life assurance RA but are not warned by the product floggers that if they join an employer that does provide a retirement scheme, they will forced to join the scheme. In such a case, it is highly unlikely that the RA member will be able to afford the contributions to both the RA and the retirement fund.
The mighty life assurance companies effectively reduced to a minimum the possible grounds for you to complain to the PFA or the life assurance ombudsman by having the High Court reverse determinations made by a former PFA, Vuyani Ngalwana.
However, then finance minister Trevor Manuel intervened and the penalties, which could be 100 percent of your savings, have been substantially reduced.
But I think there is another avenue of complaint that should be considered by policyholders and RA members who have been penalised: the Ombud for Financial Services Providers, Noluntu Bam.
Unfortunately, you can complain only about policies or RAs that you bought from October 2004, when the ombud’s office became effective.
If you have been sold one of these life assurance RAs and have now suffered a loss, the grounds for complaining could be that your adviser did not explicitly tell you about:
* The inflexibility of the product, namely that you will be penalised if you reduce your premiums/contributions, or make the policy/RA paid up (you leave the money invested but make no further contributions), or you cash in an endowment policy before maturity, or you retire before maturity date but after the age of 55 from an RA; and/or
* The better unit trust options that permit you to invest money with complete flexibility: namely, you can increase or decrease your contributions or stop paying them at any time. With a unit trust product, you can also decide at any age after 55 when you want to take retirement, and with a non-tax-incentivised unit trust fund, you can cash in any time you want.
If the financial advice ombud finds that you have not been properly advised (and this includes sins of omission as well as commission), she can order that you are compensated for any losses.
Last year, the Life Assurance Ombudsman, Judge Brian Galgut, ordered life assurance companies to pay policyholders R104 256 828 consequent of complaints he received.
He also ordered R488 963 to be paid as compensation to policyholders who were treated badly by life companies.
His office received 9 185 complaints in 2011, of which 40 percent were resolved partially or fully in favour of policyholders.
Of the complaints:
* 58 percent were about claims for benefits being repudiated by the life assurance company.
* 22 percent were consequent of poor communication, poor service or documents or information not being supplied.
* Six percent were from policyholders who were dissatisfied with investment performance, maturity value and surrender and paid-up values.
* Four percent were about assurance companies refusing to pay benefits because policyholders had not disclosed important information when they took out the policies.
* Four percent were about policies lapsing before maturity date.
* Two percent were about mis-selling.
* Four percent were miscellaneous.
Complaints involving funeral policies made up 46 percent of the total.
HAPPY ENDING FOR DISABILITY CLAIM
Sometimes sad events have a happy ending, particularly when the financial services industry plays by standards of fairness and generosity and not by the strict letter of the law. One such case is revealed in the annual report of the life assurance ombudsman, Judge Brian Galgut.
Last year the judge had to reject a complaint from a businessman who, in 2007, suffered brain damage as a result of an accident and who, with his business, consequently went bankrupt. The benefits of about R1.1 million disability cover were paid – not to him but to two banks that had sequestrated him.
The complaint was whether the benefit should be paid to the policyholder or to the trustee of his insolvent estate for the benefit of his creditors.
In terms of the Long-term Insurance Act only R50 000 is protected from creditors.
Although Galgut had to reject the complaint, save for R50 000, he did not leave the matter there. He took up the issue with the SA Law Commission, the Financial Services Board and National Treasury, suggesting that “consideration be given to amending the law.
“Within months it was made known that amending legislation would be introduced, granting full protection to an insolvent policyholder for disability benefits.”
But Galgut says the sad fact was that the policyholder would not benefit, knowing that any amendments that might follow would not of course be made retrospective.
“The sad case nevertheless had a happy ending. I conveyed this news to the complainant’s representative. He told me that there were only two substantial creditors in the estate, both being banks, and I suggested that the banks be informed of the proposed change to the legislation,” Galgut says.
Both banks agreed to waive 80 percent of their claim to the benefit payment.
The banks, whose names I do not have, did the right thing, as did Galgut, whose action will have lasting benefits for probably many thousands of people, who would otherwise be left destitute.
Contact the Ombudsman for Long-term Insurance, Judge Brian Galgut, on 0860 103 236, fax 021 657 5000 or email [email protected]