Settled Case: Utilizing Endowment Policies for Retirement Planning

The Office of the FAIS Ombud has previously highlighted the concerns it has with the manner in which endowment policies are marketed to individuals i.e., that they are recommended, marketed and sold as investments. Essentially, an endowment is a life insurance policy (with a minimum five-year term), as defined in the Insurance Act, and it does provide tax advantages for affluent individuals, i.e. those individuals whose marginal tax rate is greater than 30%. Endowment policies are also taxed within the fund and as a result the proceeds you receive with be net of tax.

This may be attractive to those individuals who are opposed to the limitations placed on retirement annuities that 2/3rd must be utilised to purchase an annuity with you only having access to 1/3rd of the retirement benefit in the form of a lumpsum. Whilst this may be an attractive proposition for some, it may well be prudent to consider this option only after you have fully utilised you annual interest and capital gains tax exemptions which is respect of interest is R23 800 for the 2022/2023 tax year for individuals under the age of 65 and in respect of capital gains tax the annual exclusion is R40 000.

In addition, there is another aspect that may increase the attractiveness of endowment policies to prospective clients looking to enhance their retirement provision and that there is no limit to the amount of offshore exposure you can have in your endowment policy.

Retirement annuities are governed by Regulation 28 of the Pension Funds Act, which, amongst other things, limits the offshore exposure of the portfolios that may be selected. Even though the maximum limit has recently been increased from 30% to 45%, no such limits exist in the funds that one may select in respect of an endowment policy.

Once again as previously espoused by this Office, being a life insurance policy, there are a number of restrictions applicable to endowment policies, so one must ensure that you receive advice from a registered financial services provider as to the appropriateness of the policy to your specific needs, and to ensure that you are advised of all the pros and cons to ensure that you can make an informed decision.

C v O

During 2012, the complainant applied for an endowment policy with the respondent which incepted on 1 January 2013 for a period of 10 years. During 2018, the complainant successfully applied for a partial disinvestment in the amount of R10 000 and had successfully applied for a zerointerest loan of R10 000 during 2021. During 2019, the complainant had also voluntarily requested to increase her premiums on. When the complainant sought to access 100% of the remaining funds at maturity, she was informed that as a result of the premium increase, that was in excess of 20%, the policy had entered into a new 5 year restriction period and that the funds would now only be available 1 December 2024.

The complainant claimed that she was not advised that should she increase her monthly premium that the policy would enter inro a new restriction period, and she requested that the remaining funds be released to her.

After numerous much correspondence was exchanged with the respondent, this Office requested that the respondent not only show compliance with the provisions of the Code at the inception of the policy, but that the complainant was provided with concise details of the limitation applicable to the premium increase, when the complainant had applied for the premium increase.

Section 7(1)(c)(vii) of the Code provides that concise in rendering the financial service the FS must disclose concise details of any special terms etc. in respect of the specific product. Had the respondent complied with this Section of the Code, the complainant would have been placed in a position to make an informed decision as required in terms of Section 7(1)(a) of the Code.

The respondent responded that as it had failed to caution the complainant when she had applied for the premium increase, it would make a business decision to amend the restriction end date and allow the withdrawal. The complainant completed the disinvestment forms together with all supporting documents, and she received a total payment of R69 544.2 in full and final settlement.

Lesson Learned:

  • Whilst endowment policies can be utilized as alternatives to retirement planning, endowment policies are provided for a specific term, the minimum of which is five years. During this term the investor is restricted with regards to accessing the proceeds thereof.
  • Prospective clients should therefore thoroughly consider the appropriateness of this product if they anticipate the possibility of needing to access the funds within the restriction period. Increasing your contributions towards an endowment policy by more than 20% or more above the higher of your total contributions in the previous two years, will see your policy enter into a new restriction period.

Always be aware of this and ensure that any such decision is taken after you have sought advice from a registered FSP.