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Avoid making early withdrawals from investment policies

13 September 2021 Old Mutual

Financially stressed South Africans might be thinking about taking cash out of their endowment policies – this is an investment policy taken with an insurer where you commit to saving regularly over a specified term, to be able to obtain a lump sum amount on policy maturity or to provide for beneficiaries when the life insured passes.

However, warns Old Mutual, early withdrawal penalties can harm the amount that is received when the policy proceeds become payable.

Generally, it’s important to know that products that are designed for a long-term investment tend to have early withdrawal penalties when withdrawals are made before the maturity date. It does not matter whether the contributions you make are on a once-off basis, or need to be paid monthly, the rule will still apply.

This happens because of the way that the products are designed. Rose Khutlang, Old Mutual Provincial General Manager, explains: “When a customer takes out a long-term investment policy like an endowment, the insurance company may pay for certain expenses upfront – with a view of recovering these upfront costs as the policy grows. If money is withdrawn before the planned maturity date, charges will be applied to recover upfront costs.

“Whether you are cancelling an investment policy, taking out cash, or taking out a loan against your endowment, these penalty charges could apply,” says Khutlang, stressing that charges typically have two parts:

· A fixed penalty amount is calculated against the investment, and
· An adjustable penalty amount is charged. This starts at 15% and goes down to zero during the first half of the investment period.

Terms that apply to these withdrawal charges are usually decided by the length of time that the money is earmarked for the investment.

Several conditions apply to some Old Mutual endowment policies.
• Within the first five years, no part-withdrawals are allowed. However, customers can apply for an interest-free loan against a policy.
• Only one loan is allowed per policy. The loan can be repaid at a later agreed date, or the policyholder can elect not to repay the loan. If this course is chosen, the loan amount is deducted when the policy ends. The amount of money that the policy finally pays out reduces accordingly.

The maximum loan amount allowed by Old Mutual is 90% of the value of the policy. Charges are then taken off this amount.
• After five years, money can be taken out of the savings policy. Any money that is withdrawn will result in less money when bonuses are paid. The amount that would have been paid out if the policy went to full term also decreases.

Endowment policies are designed for the long term. We encourage customers to avoid penalties by striving to maintain their investment over their planned period. Depending on how early you take money out of a policy and even given any extra money the investment has earned in bonuses, you could possibly get less money out than the amount you have paid in,” says Khutlang.

“Taking money out of a fixed-term investment policy should be avoided whenever possible, especially where the policy was originally taken to achieve specific financial goals. Before you decide to withdraw funds and possibly pay penalty fees, you should talk to your financial adviser about the benefits and costs involved.”

“While it is not always easy for cash-strapped customers to stick to their savings goals, the best way to keep precious long-term investments in one piece is to have a long-term view. Make sure you can get extra cash when you need it by setting up and building an emergency fund that is easily accessible, separate from your long-term savings policy,” says Khutlang.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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