So, you’ve been a loyal soldier, paying R500 every month for yonks (a long time) into a retirement life policy. You’re probably thinking, “Is this thing even working for me, or am I just feeding the beast?” This isn’t just about saving for the future; it’s about making sure your hard-earned cash isn’t getting eaten alive by fees and underperforming. We’ll show you how to do the math yourself so you can sleep a little easier at night.
Why This Matters in Mzansi (South Africa)
Listen, this isn’t just a hypothetical chat. The numbers are a bit shocking. According to the Financial Sector Conduct Authority (FSCA) in 2023, a massive 61% of retirement life policies in South Africa are ditched before they even reach maturity. That’s a whole lot of people who probably realised too late that their policy was a dud, barely keeping up with inflation. We’re here to help you avoid being one of them.
Step 1: Gather Your Policy Documents
Before we get down to the nitty-gritty, you need to be a bit of a detective. Grab your policy documents and look for these three things:
- Projection statement: This is the big one. It shows you what the insurer promises your policy will be worth in the future.
- Current surrender value: This is the cash you’d get if you decided to pull the plug right now. If you can’t find it, just give your insurer a shout (call them).
- Premium breakdown: You need to know how much of your monthly contribution goes to fees and how much actually goes into the policy’s investment part.
Let’s use a real-life example to make things lekker (nice). We’ll pretend we’re looking at a 10-year-old 1Life policy with:
- A R250,000 death benefit.
- A R38,000 current cash value.
- Monthly premiums of R1,200.
Step 2: Calculate Your True Costs
This is where things get real. We’re not just looking at the monthly debit order; we’re digging into the hidden costs.
A. Fee Analysis
This is where many policies fall flat on their faces.
- Upfront commissions: Think of this as a “finder’s fee” for the broker. It’s often a whopping 80-100% of your first year’s premiums. So, if you paid R14,400 in your first year, a good R12,000 of that probably went straight to the broker’s pocket. Yikes!
- Annual policy fees: These are the “maintenance” fees, usually around 1.5-3% of your policy’s cash value. In our example, a 2% fee on the R38,000 cash value means a hidden fee of R760 a year. That’s a lot of money disappearing quietly.
B. Opportunity Cost
This is a simple but powerful concept. It asks: “What could my money have done if I hadn’t put it here?” Let’s compare our example to a more straightforward investment.
- Tax-Free Savings Account (TFSA): A super popular option in SA because you don’t pay any tax on the growth.
- Low-cost ETF: Think of something like the Satrix Top 40, which tracks the biggest companies on the JSE. Historically, it’s given returns of around 10-12%.
Calculation:
Let’s say you invested that R1,200 a month in a Satrix ETF for 10 years at a 10% return. You’d have about R245,000. Compare that to our policy’s cash value of a measly R38,000. The difference is like chalk and cheese (a huge difference).
Step 3: Project Future Value
Now let’s look into the crystal ball.
Policy Projection
Look at the guaranteed growth rate from your insurer (not the “illustrative” one, which is often a bit of a fairy tale). Most of these policies in SA are only growing at a sluggish 4-6% a year.
Example (Next 10 Years):
If our R38,000 cash value grows at 5% for the next 10 years and we keep adding R1,200 a month, our future value will be around R215,000.
Alternative Investment
What if you invested that same R1,200 a month into a balanced fund (which is a bit less risky than a pure ETF)? A 9% return over 10 years would give you about R232,000 (before tax). See how the numbers start to stack up?
Step 4: Check Surrender Penalties
This is the big catch. If you decide to bail, your insurer will likely charge you for it.
- Surrender fee: This is typically 5-7% of your cash value, especially in the early years.
- Tax on gains: If you surrender before you’re 65, you’ll have to pay tax on any profit you’ve made.
Example:
- Surrender value: R38,000.
- Surrender fee (at 7%): R2,660.
- Tax: You’ll pay tax on the difference between the R38,000 and the total premiums you’ve paid over the years, at your marginal tax rate.
Step 5: The 3-Way Decision Test
Time to make a call. There are three options, and you have to decide what’s best for your situation.
1. Keep It If…
- You absolutely need the death benefit for your family.
- The returns are actually beating inflation and the fees.
- You’re just a few years away from the policy maturing anyway.
2. Surrender It If…
- The fees are eating more than 30% of your premiums.
- Your cash value is less than 60% of what you’ve paid in.
- You can clearly see that you’d get much better returns somewhere else.
3. Paid-Up Option (If Available)
This is a good middle ground. You stop paying premiums, but the policy stays active with a reduced cover amount. This is a smart move if your policy is old (like, 15+ years) and you don’t want to lose what you’ve put in, but you also don’t want to keep paying.
Case Study: Thando’s 1Life Policy Decision
Using our example, let’s look at Thando’s policy. After 10 years, the total cost of his premiums was R144,000, but the policy’s current value is only R38,000. If he had invested that same R144,000 over the last 10 years at a reasonable 10% return, it would have grown to a projected R245,000. While his policy does offer a R250,000 death benefit, an alternative investment would have provided a much higher cash value.
Therefore, Thando’s best decision would be to surrender the policy, invest the cash difference into a higher-performing fund, and purchase a separate, low-cost term life policy to maintain a death benefit.
Red Flags Your Policy is a Dud
Watch out for these tell-tale signs that your policy isn’t doing its job:
- Your cash value is less than 50% of what you’ve paid in after 5+ years.
- Your advisor is a bit sketchy and avoids telling you about the fee breakdown.
- The projected returns are less than 6% a year, which is basically below SA’s average inflation rate. You’re losing money in real terms!
Next Steps
Now you know what to look for, so here’s what to do:
- Ask your insurer for an “in-force illustration.” This is a fancy term for a report that shows you exactly how the policy is performing.
- Use a free calculator like the one from Momentum to get a clearer picture.
- Talk to a fee-only financial advisor. They get paid a flat fee for their advice, so they don’t have an incentive to sell you a product that earns them a commission.
Final Tip: A wise man once said, “If your policy hasn’t broken even after 7 years, it likely never will.” Don’t be shy to cut your losses and put your money where it will actually grow.
