Better than the bank?

(22.8.04) Eugene Kruger, an actuary at Sanlam, says that an endowment or investment policy offers one the opportunity to save in a disciplined way.

Some advantages that an endowment policy offers you:

• In the medium or long term an endowment policy delivers a better return than a savings account at the bank.
• It is a surer long-term investment (usually between five and fifteen years) and a much more disciplined way of saving because you cannot withdraw the money every time that some new fad comes your way.
• It offers considerably wider investment possibilities than bank savings accounts and by means of a policy you can invest in almost every possible investment instrument (or a combination of investment instruments) that are available, such as cash, equities, securities and even property, while it also offers you the chance to diversify your investments in offshore markets and/or among different asset managers.
• With the new generation of more flexible policies you are not bound to one investment fund and from time to time you can move your money to whatever source you feel will give you the best return.
• In addition to being used as a vehicle for building up a nest egg, or saving for a financially secure retirement, an endowment policy is also ideal for making provision for something specific such as a long anticipated overseas trip, a deposit on a new house, or to make provision for your child’s tertiary training.
• The proceeds from an endowment policy are often taxed at a better rate than other investments, or than your personal tax rate.

In the case of many people policies are also their only security in financially difficult times. An endowment policy can be offered as security if you have to borrow money or enter into a hire-purchase agreement.

Furthermore endowment policies offer tax benefits because you receive the policy proceeds tax-free.

The insurance company has already paid tax on the underlying assets in the policyholder fund at a rate of 30%, which is usually lower than the rate that an individual has to pay.

What do you do if you are hard-pressed financially and the policy can no longer pay out? “At all costs try to avoid having the policy lapse”, says Kruger. “That must really be your last resort.”

It is not a good idea to surrender your policy either. Rather make a one-off cash withdrawal or take a loan against the policy.

But if you should decide that it is absolutely necessary in order to avoid financial straits, depending on the cash value of the policy you will recoup part of the money that you paid into the policy after administration costs have been covered.

If your policy has not yet accumulated enough cash value, it will lapse if you stop paying the premiums.

Kruger says that if you are really in financial difficulties and cannot pay the premiums, you should rather ask the insurance company to make the policy fully paid-up than surrender the policy.

You can do this only if the policy has already built up a cash value, which means that your premiums plus the growth on them exceed the outstanding policy costs.

If the policy has been made paid-up you can stop paying the premiums, but the cash value on your policy is held as an investment and will continue to grow.

The cash value and the further proceeds on it will be paid out in the usual way on the maturity date. In some instances when your financial situation has improved at a later stage you can resume paying the policy premium.