Back in the day
In the not-so-distant past (think the 90s and before), the primary type of life insurance products sold in South Africa were called “Universal Life” products. If you thought that life insurance of today was complex, wait until you hear how these products worked:
Of course there were multiple versions of this product type, but the general mechanism worked as described above. The theory was that investment returns could outstrip the rising cost of cover over time, leaving clients with a nice pot of money while they were alive, as well as benefiting from having cover in place from the get-go.
Unfortunately, theory met reality and those outcomes weren’t reached. You see, when these products were originally designed, South Africa was in a fairly high-interest, high-inflation environment, and the assumption of very high investment returns into the future didn’t pan out.
At the same time, we know that as people age, the cost of claims for life insurance increases. While this is not unexpected and is certainly anticipated, what ended up happening is that the cost of the cover exceeded the sum of the premium and investment growth.
This meant that in many cases the investment fund reached a point when it started to shrink, rather than grow (as planned) and the pot-o-gold which was anticipated shrank away. Needless to say, this did nothing for the reputation of life insurers who had created an expectation with their client that they couldn’t meet. The money wasn’t stolen, but the economic assumptions made when the products were priced didn’t land up happening.
Along came change
At the turn of the century, driven by Discovery Life, the South African market followed a global trend of simplifying life insurance products to what we know today - where you simply pay a premium for cover: if you claim you get paid, and if you don’t you don’t. We could call this a more pure form of life insurance without the complexity of an investment fund playing a central role to the product.
Then we changed the change
At Sanlam Indie, we like the concept of a pure life insurance product, but don’t like the fact that you only get to benefit from the cover if you die, become disabled or suffer a horrible illness. Which is why we built the Wealth Bonus.
Let’s unpack how this works, and show how it brings back the magic of Universal Life, without any of the drawbacks.
The primary differences are that there is no link between the cost of the cover and the Wealth Bonus, and the two sides (namely the cover and the Wealth Bonus) have no link other than the portion of premium determining how much more is going in. And of course, if the entire policy is lapsed or cancelled, both parts will fall away.
Put differently, we never take anything out of your Wealth Bonus. We only put money in, and when you withdraw money - through CashDrops or much later at maturity - the fund reduces. This also means that the investment return, which of course can be higher or lower than we expect today, has no impact on the cover side of your policy. Negative investment returns could also mean that your Wealth Bonus is lower over time, but this is true of any investment product.
So, while it’s easy to make the mistake of confusing the great Wealth Bonus with not-that-great Universal Life cover, try to remember that there are real and deliberate differences between the two.