South African insurer, OUTsurance, currently offers its clients an option to get back all of their premiums if they do not claim for 15 years – but the bonus comes at a price.
The OUTsurance Life OUTbonus is a massive marketing tool for the company, which, according to the group’s full year results for 2014, led to a 43.4% increase in written premiums for the year.
The terms and conditions for the product carries a stipulation that, in order to claim the full total of premiums paid after 15 years, clients would have to opt-in to OUTbonus at a price.
The price is simply that monthly premiums would be around 30% higher – or as the insurer puts it: if you choose not to take the bonus, your premiums would be around 30% lower.
“You can choose the 100% OUTbonus benefit which will give you all of your paid premiums back in cash after 15 claim free years. By not electing this product option you can reduce your monthly premiums on average by 30%.”
This presents a question: Is the life bonus a good long-term investment, worth the additional 30% charge?
An example quote used by OUTsurance takes a monthly premium of R1,803 for R2.5 million life cover, including the added charge for the OUTbonus.
According to OUTsurance, the premium option used would see a 7.5% annual increase in premiums (though the group notes it is age-dependent and averages around 6%), which over 15 years would see R568,509 paid in total- which is returned if no claims are made in 15 years.
Working on an annual inflation rate of just over 6%, this works back to be just over R237,000 in today’s terms.
Foregoing the OUTbonus option, OUTsurance Life CEO Willem Roos, said the premium in this case would have been 28.9% less – around R1,280 (less the R520 bonus charge).
Over 15 years, on the same option with the same annual increase, you would thus save just under R165,000.
A different option
If one were to take that bonus charge of R520 per month and invest that on the JSE instead, you would have to work quite hard to match the OUTsurance bonus – but it can be done.
The JSE all-share index has grown from around 8,500 points in 2000 to 53,000 points in 2015, showing around 13.2% growth on average, annually.
If this rate were to be projected moving forward, a R520 per month investment (R6,240 p.a.) growing at 13.2% annually would yield R296,400 after 15 years, not taking into account inflation and other factors.
According to Roos, the group’s own calculations show that an investment portfolio would need to generate a return of approximately 17.7% – after tax – to receive an amount of R568,509 after 15 years.
There are investment portfolios, funds and options that could yield higher returns than that, with a long-term view in mind, though this involves a greater degree of risk.
A ranking compiled by MoneyWeb in January, shows that some of the top performing equity funds in South Africa have shown an annualised total return between 17% and 20.3% in the past decade.
“On average the charge for the Life OUTbonus comprises 30% of a client’s premium. In this instance specifically, the OUTbonus charge equals 28.88% of the premium,” Roos said.
“Should the client not lapse in the next 15 years and receive the bonus, (we believe) he would have received exceptional value for money.”
However, what is important to note with the OUTsurance bonus is that in the event that one is diagnosed with a terminal illness, or one’s family needs to claim before the 15 year period is up, the bonus effectively disappears, and cannot be claimed.