Lower AIDS deaths can save you money!
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People who are HIV+ are living longer when receiving anti-retroviral treatment (ART) and this trend can put more money in your pocket. In this blog, I will explain why lower AIDS deaths can save you money, even if you are not HIV+.
Many people in SA buy and own only one type of life assurance product, namely a funeral policy. The problem with funeral products are that although the premiums (amount you pay every month) are quite low, the death benefit that your family receives upon your passing (the sum assured) is also very low and you typically don’t receive anything if you survive for a long time, i.e. you don’t get to save anything in these policies.
The main difference between a funeral product and other forms of life assurance is that a funeral product is typically not underwritten. That means that you can get the policy without having to submit to an AIDS test, you don’t need to go for a medical examination and you usually don’t even have to answer a questionnaire. Without underwriting, the life assurer charges a much higher premium as they have no information about your health. A simple way to reduce the premium that you pay is to buy an underwritten policy. However, you will have to submit to those tests and answer some questions.
However, even if you decide to stick with a funeral policy, my academic research (done in conjunction with the University of Stellenbosch and Deloitte) has shown that this situation is very likely to change in the light of lower AIDS mortality (fewer people dying of AIDS and HIV+ individuals living longer on average). The research shows that funeral products should become better value for money (more sum assured relative to premium), should start offering larger benefits, should start to reward clients that remain loyal and should allow clients to start saving more.
There are two reasons why funeral policies do not currently offer as good value for money as they will in the future. The first reason is AIDS and the second is lapses (when people buy a funeral policy, but do not stick with it).
As a result of AIDS, in 2005, the average person in SA only lived for 54 years. Today that number is 62 years. We forecast that life expectancy of the average South African will rise to above 65 years in the next decade. The maths is simple, the longer you live, the more premiums you can pay on a funeral policy and therefore the higher your sum assured will be. As a result, as life expectancy improves, funeral policies will become cheaper. They already have to some extent, but life assurance companies are conservative and will not re-price based on an expected improvement. They will only re-price on an actual delivered improvement.
Lapse rates on funeral policies are more than twice as high as on other life assurance policies and by year 5, less than half of funeral policyholders still have their products. This makes these policies poorer value for money for all policyholders. Why? Because a broker or agent typically receives a commission when you buy a policy and if you do not stick with the policy long enough, there is not enough time for this commission to be paid back through your premiums. Hence, the premiums are higher for everyone.
In our research, we have shown that the increased life expectancy of South Africans as a result of lower AIDS deaths, creates the opportunity to incentivise policyholders to stay with their policies longer and as a result obtain better value for money for themselves and help all policyholders to get better value for money. What incentives am I talking about? Two examples would be a cash back benefit (in our research we spoke about a cash back every 5 years) or a surrender value after 5 years (that means that if you keep your policy for at least 5 years and then decide you don’t want it any more, you will get money out).
In our research, we have modelled an improved mortality scenario (that is the number of deaths in South Africa going forward) and have considered different lapse scenarios (where lapses are lower than the current high levels). We then applied this to two policy examples, namely a cash-back funeral policy and a funeral policy with a surrender value. The examples are mutually exclusive.
We show that with the expected improved mortality, policyholders could get more than 1 year in premiums back every 5 years and with lower lapses (people staying with their policies longer), this could increase to 18 months premiums every 5 years. Alternatively, we show that a surrender value equal to 30% of premiums paid could be offered after year 5 allowing for improved mortality and this could increase to 50% if lapses also improve. What is interesting is that life assurers should be able to offer these improved benefits without it impacting their profitability. This should be a win/win situation.
I see a near future where people in SA will start to get better value for money on their policies, especially if they are currently buying funeral policies. I see more people getting higher life cover to better look after their dependents when they die. I see an increased opportunity for people to save and for the country’s savings rate to go up. At the same time, I see life assurers doing more to get more people covered, without having to sacrifice their profitability. This future is likely to happen and you can play your part in making sure it happens and that you benefit from it.
So what can you do to save money?
- Get tested for AIDS and if you need to, get treatment ASAP;
- Get an insurance policy that requires some form of underwriting – medical questionnaire, physical, AIDS test as in most cases you will pay less;
- Once you have an insurance policy, especially one with a savings element (like a surrender value), try and stick with it, even through the bad times as it will allow you to get more out of the policy;
- If you are buying a funeral policy, ask for a policy that will give you something back if you survive and stay with the policy; or
- If you are buying a funeral policy, ask for a policy that will give you some form of savings, probably through a surrender value; and
- If you notice that you are paying less for your insurance, save the difference – RSA retail bonds through the post office may be a good option as the fees are low.
What is your perception surrounding funeral policies? Do you have one? Would you take more cover if the premiums were lower? Do you like the idea of getting a cash-back or surrender value benefit? Would you consider submitting to medical tests and questions if it will save you money? Let me know what you think. Until next time, keep your talking straight!
You can download our full paper on AIDS mortality at http://www.actuarialsocietyconvention.org.za/assets/pdf/papers/2014%20ASSA%20Strydom.pdf and the presentation that we gave at the 2014 Actuarial Convention at http://www.actuarialsocietyconvention.org.za/assets/pdf/presentations/Strydom.pdf.