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Global & Local Financial Consultants (Pty) Ltd Life Assurance

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                        GLOBAL & LOCAL FINANCIAL CONSULTANTS (PTY) LTD 
                        Registration no : 2005/029736/07 
                        VAT no : 4220193488 
                        175 Barry Hertzog Avenue 
                        Emmarentia Ext, JHB, 2195 
                        Tel : 011 486 2500 
                        Fax : 011 486 2915 
                        Web: www.globallocal.co.za  
                         
                         


                                                                                                         
        Global & Local Financial Consultants (Pty) Ltd. Life Assurance Advisory
                                       Division


        Description of Life Policies, Benefits Thereof and General Explanation of
                                Mechanics of Life Policies



        Reasons for Affecting a Life Policy:

                To provide capital for the life assureds beneficiary or estate after death.
                To provide capital for life assured in the event of disability.
                To provide capital for the life assured in the event of the life assured
                contracting a dreaded disease.
                To provide an income for the life assured in the event the life assured is
                declared disabled, no longer able to generate an income and/or
                perform their occupation.
                For corporates to protect themselves against the death or disability of a
                key person/employee.
                For partners/shareholders of a company to be able to fund the
                purchase of the shares held by another partner/shareholder after that
                shareholders death and/or disability.

        What is a Life Policy?

        In its simplest form a life policy is a contract between the policy owner/holder
        and the life company/assurer that provides that in return for an agreed to
        ongoing payment (Premium) the policy holder will have the benefits stipulated
        in the policy paid to the beneficiary of the policy when a certain event occurs.

        The Events typically covered in a life policy are:

        On the Life Assured:

                Death of the Life Assured.
                Disability of the Life Assured.
                If the Life Assured is no longer able to provide and income and/or
                unable to work and/or exercise their profession.
 
                                                                              Director : Michael Haldane 
                                                                      Email : michael@globallocal.co.za 
                                          We are an authorised financial services provider – FSP No 1644 
        Page 1 of 12 
        If the Life Assured contracts a Serious Illness/Dread Disease/Critical
        Illness (Different Insurers use these different terms for essentially the
        same benefit).

What are the Benefits?

Benefits on the policy are typically a lump sum of capital and/or a monthly
income paid to the beneficiary.

Who are the Beneficiaries?

The beneficiaries are those person/s who will benefit when the event occurs.
This may or may not be the policyholder or even the life assured.

Example: Tom has a R1m Life Policy that pays out on death, his wife is the
beneficiary. Tom dies, R1m gets paid in terms of the contract to Tom’s wife
Vera by the Life Company/Office/Assurer.

Who are the parties to a policy?

                Policy Holder: Owns the policy (but does not always pay the
                premiums + does not always benefits from the policy + is not always
                the life assured).
                Life Assured: This is the person who is insured under the policy.
                Payor: This is the person who pays the premiums.
                Beneficiary: This is the person/company/entity that benefits from the
                proceeds of the policy.
                Cedent: This is the person/company/entity to whom the policy is
                ceded. In other words this person will benefit from the policy until
                such time as the cession is lifted (This is used often where a
                company owner approaches a finance house for finance. A ceded
                policy is often the surety for the finance house).

Types of Benefits Available on a Life Policy

        Life Cover (Sometimes referred to as “Death Cover”)

This is the capital lump sum paid to a beneficiary when the life assured dies.

        Disability Cover

The following types of disability cover exist:

Own or Similar/Reasonable Occupation: Pays a capital lump sum to the life
assured (Sometimes a beneficiary) in the event that life assured is declared
disabled and can no longer practice his/her own or a similar
profession/occupation. Example: An engineer who gets disabled and is
covered under such a benefit, loses use of hands and can therefore no longer
design the machinery he used to prior to the disability but could still supervise



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other engineers or draftsman, the claim could be paid in part under this
definition.

Own Occupation: Pays a capital lump sum to the life assured (Sometimes a
beneficiary) in the event that life assured is declared disabled and can no
longer practice his/her profession/occupation. Example: An engineer who gets
disabled and is covered under such a benefit, loses use of hands and can
therefore no longer design the machinery he used to prior to the disability the
claim would be paid in full.

Functional Impairment: This disability benefit definition relies on disability
been declared based on the functions of an organ of the body. Such as due to
the engineer mentioned above, losing the full function of his lungs due to the
fumes inhaled in the factory where he works, this would be a successful claim.

Physical Impairment: This disability benefit definition relies on disability been
declared based on the functions of an organ of the body. Such as due to the
engineer mentioned above, losing the full function of his lungs due to the
fumes inhaled in the factory where he works, this would be a successful claim.

Comprehensive Disability Cover: Is the most expensive form of disability
cover but it does cover all the above definitions of disability. This is also the
form of cover where the probability of successful claim is highest.

        Dread Disease/Severe Illness/Critical Illness Cover:

Again, different Product Suppliers name their versions of this cover slightly
differently but the above is the general terms used.

Over and above the terms mentioned above sometimes the term “Trauma
Cover” is also used.

This benefit covers the life assured in the event of a disease being contracted
that would affect the life of the life assured.

Typically this refers to disease such as heart attack/cancer and stroke.

The severity of the disease is assessed differently by the different product
suppliers. The way in which the benefits are paid out by the product supplier
differs from product supplier to product supplier.

Such as where a heart attack is concerned product supplier (a) may use the
definition supplied by the New York Medical Association, whereas product
supplier (b) may use the level of heart muscle contraction measured by a
registered cardiologist.

An adviser should be aware of the definitions used by the various product
suppliers as these can be confusing as where one supplier may use the
definition supplied by the New York Medical Association where heart attack is
concerned, but may only pay out the benefit on a stage 4 cancer victim!


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There are 2 different levels of cover available from most Product Suppliers
namely:

Core Dread Disease: This refers to the life assured being covered for the 3 or
4 main forms of dread disease such as Heart Attack (myocardial Infarction);
cancer and stroke.

Comprehensive Dread Disease: This refers to the life assured being covered
for the 3 or 4 main forms of dread disease such as Heart Attack (myocardial
Infarction); cancer and stroke as well as a more comprehensive covered
diseases list such as Parkinson’s Disease or Multiple Sclerosis.

Severity Based and Maximum Cover: Within the core and comprehensive
cover is an option to take up severity based or maximum cover. Severity
based pays a percentage of the benefit depending on the severity of the
illness. Again, the percentage paid varies from product supplier to product
supplier. Maximum cover is the most expensive but pays 100% of the benefit
amount in full.

Please be aware: That due to high claims being submitted for certain “easy to
fake” conditions many of the product suppliers exclude certain conditions in
their policies, these are conditions such as back pain or fibromialgia (The
patient feels pain even from the slightest touch!).

In addition that on life cover most product suppliers have a 2 year suicide
exclusion clause for the first 2 years of a policies existence.

        Accidental Death and Disability:

These benefits are at the bottom end of the benefits covered by life policies. In
fact the above mentioned “Standard” death and disability definitions normally
include death and/or disability caused by accidents.

However often a life assured may not qualify because of medical reasons for
the “Standard” benefits and would therefore still be able to have some form of
cover under accidental death or accidental disability benefits.

As the name implies this cover only covers the life assured in the event of an
accident being the cause of the reason for the claim.

In other words if Mr. Mouse had accidental death benefit on his policy and he
died as a result of a motor vehicle accident, then in this case the life company
would payout the sum assured.

        Loss of Income Cover/Income Protection Cover:

This benefit covers the life assured against the loss of income if the life
assured is declared disabled and can no longer practice his occupation (The



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definitions used are similar to the occupational disability definitions mentioned
above).

However the difference between this benefit and the abovementioned capital
disability or lump sum disability benefit is that the income protection or loss of
income cover (the terms used vary sometimes from product supplier to
product supplier but the benefits are basically the same) provides the life
assured with cover in the event of disability however in this case the benefit is
paid as a monthly income.

For example:

Mr. M. Mouse earns R10,000 per month and effects loss of income protection
on his life policy for the maximum allowed by the Life Offices Association
Protocol (75% of monthly earnings).

In the event of Mr. Mouse being declared disabled he would receive a monthly
income of R7,500 per month to maximum age 65.

The premiums on this benefit are tax deductible!

This is always a stand-alone only benefit on a policy.

The reason for the maximum of 75% of monthly income in terms of the Life
Offices Association (LOA) is that in the past it was found that many dishonest
policy holders would try and get themselves fraudulently declared disabled in
order to claim 100% of their monthly earnings from the insurers, thus
increasing the claims on the insurers risk pool, which would ultimately cause
the increase in premiums.




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How Benefits are structured under a policy:

It is possible for 1 policy to have multiple benefits such as

          Policy 1: Mr. M                   Benefit 1: R1m
          Mouse Life                        life cover
          Assured

                                            Benefit 2: R1m
                                            Disability Cover
                                             

                                            Benefit 3: R1m
                                            Sever Illness
                                            Cover



                                            Benefit 4:
                                            R10,000 per
                                            month Loss of
                                            Income Cover




    Multiple Benefits under a life policy can be either Accelerated or Stand-
    Alone, the difference between these different structures are as follows:

    Accelerated Benefits:

    When a client has a policy with accelerated benefits this simply means that
    there is only 1 maximum amount the policy pays out no matter how many
    benefits have been linked to it.

    So let’s assume a client (Mr. M. Mouse) has a policy with accelerated
    benefits and he is covered against death (R1m) and disability (R1m).

    This simply means that should Mr. Mouse be declared disabled and gets a
    50% claim (Lets say he has lost the use of his legs) this means that should
    he die at a later stage the value of cover paid to his estate would only be
    R500,000 as R500,000 had already been paid when he claimed for
    disability.

    An easy way to illustrate this is consider a bucket with the R1m benefit in
    the policy.




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    Before any claims on the policy:




                  R1m in 
                  benefits 




    After R500k disability claims on the policy:




                R500k in benefits 
                left in benefits 




This option is less expensive than the Stand Alone option.

Stand-Alone Benefits:

A policy with stand-alone benefits is more expensive but it does provide
multiple benefits which are not reliant on each other.

Simply put, if we use the Mr. Mouse example above, if the same disability
happened, but in this case this client has a policy with stand-alone benefits
then in this case the claim for disability would have no effect on any of the
other benefits on the policy.

In other words the policy has multiple “buckets”, as illustrated:




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                              Mr M. Mouse Life Policy




       Life                            Disability                  Severe 
     Cover R                            Cover                      Illness 
       1m                                R1m                       Cover 
                                                                    R1m 




Therefore if Mr. Mouse claims R500,000 on his disability benefit this does not
affect the other benefits under the policy.

It merely affects that specific benefit for example:

Let’s assume Mr. Mouse has a R500,000 claims on disability and he has a
policy with Stand-Alone benefits then after the payment of his claim the
following will be the benefits underlying in his policy:

                              Mr M. Mouse Life Policy




       Life                                                        Severe 
     Cover R                                                       Illness 
       1m                                                          Cover 
                                                                    R1m 

                                       Disability 
                                       Cover 
                                       R500,000 




Policy Premium Pricing Options:

In the modern policy era, it is very easy to become confused with how a policy
premiums are priced.




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Generally speaking on most of the new modern policy structures each benefit
included in a policy is priced individually for example, if we go back to Mr.
Mouse whose policy is priced as follows:

                                                Premium per
 Type of benefit               Level of Cover   month
 Life Cover                    R 1 000 000.00   R 200.00
 Capital Disability            R 1 000 000.00   R 200.00
 Severe Illness Benefit        R 1 000 000.00   R 200.00
 Loss of Income Cover (PM)     R 7 500.00       R 200.00
 Total Premium                                  R 800.00
 Policy Fee                                     R 15.00
 Total Policy Premium                           R 815.00

        Premium Patterns:

There are a variety of premium increases which are coupled together with
benefit increases available from the various product suppliers.

However, let’s start with the simplest example which in my mind forms the
basis to all the rest.

In the above mentioned policy for Mr. Mouse, he has a R200 premium for R1
million life cover for whole of life (Meaning that should the life assured keep
this benefit for the rest of his life and does not increase the level of cover then
the premium will stay the same). Thus, if we had to draw a graph then the
premium pattern would be as follows:




    R1,000,000 Death Benefit




      R200 Premium




This is referred to as level premium/level benefit premium pattern.




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However it is possible to make the policy more affordable to the policyholder
/payor at the beginning by making the benefit level but the premium increasing
per annum at a specified rate such as 5% per annum or implementing an “age
rated” premium pattern. Age rated premiums increase annually depending on
the life assured’s age. Again, these increases differ from product supplier to
product supplier

In this case the premium would be cheaper at the beginning of the policy.

In this case the above graph would be as follows:




    R1,000,000 Death Benefit remains level




    Premium begins at R150 per month increasing at 5% per annum




Obviously it is possible to increase the premium and the benefit every year,
for example:

 Year Number                  Premium        Level of Cover
 1                            R 200.00       R 1 000 000.00
 2                            R 210.00       R 1 050 000.00
 3                            R 220.50       R 1 102 500.00
 4                            R 231.53       R 1 157 625.00
 5                            R 243.10       R 1 215 506.25
 6                            R 255.26       R 1 276 281.56
 7                            R 268.02       R 1 340 095.64
 8                            R 281.42       R 1 407 100.42
 9                            R 295.49       R 1 477 455.44
 10                           R 310.27       R 1 551 328.22
 20                           R 325.78       R 1 628 894.63




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        Premium Guarantee Patterns:

Fixed Guarantee: On this option the premiums are guaranteed not to increase
over and above the standard annual increase for a fixed period by the life
company.

It stands to reason that the longer the premium guarantee period chosen the
higher the initial premium will be.

Experience Rated: On this option the premiums are not guaranteed for a
specific period and could increase over and above the standard annual
increase. This is dependent on the product supplier’s claim experience. The
more people claim the higher your premium could increase. However, based
on our experience in the industry this has never occurred. If it did, the policy
holder would simply shop elsewhere for a cheaper premium.

        Premium Loadings:

At times, when a life assured proves to have some “issue” that cause concern
to the life assurer, the life assurer may choose to provide the policy holder
with a counter offer letter at the underwriting stage.

This can be due to the presence of pre-existing medical conditions or lifestyle
aspects that increase the risk. As an example, an individual who does base
jumping as a sport would be loaded due the higher risk.

In such cases the life company may offer the client the full benefits but may
adjust the premium upwards, known as “loading the premium”.

        Benefit Exclusions:

If the life assured proves to be a higher risk to the life company the life
company can also exclude certain benefits or certain conditions from the
policy.

Let’s assume Mr. Mouse has had a heart attack prior to application (after his
beloved wife Mrs Minnie Mouse left him for his best friend Mr. D. Duck!). In
this case the life company could exclude any heart condition from the policy
either totally or for a period.

        Deferred Life Cover:

This has happened to me only once but it does exist.

Sometimes the life company will assess a life assured at underwriting stage
and conclude that they will offer the life assured the requested cover only after
a specified period, usually 2 years.

If we go back to the previous example, Mr. Mouse has had a heart attack but
that was 2 years ago, however there is now an ongoing risk, the life company


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may counter offer the client the full cover only after 2 years of having the
policy.

This simply means that if there is a death claim submitted on the policy prior
to 2 years having surpassed then the life company will simply reject the claim
and refund all premiums to the estate. However, if the claim is submitted after
the initial 2 years then the claim will be paid in accordance to the cover and
normal claim requirements.

If the individual passes away due to an accident within the first 2 year period,
the claim will be paid in full, deferred life cover is always offered due to health
reasons.

In conclusion: This is not a comprehensive guide to life assurance but a
simple guide of some of the other broad picture concepts.

We trust this is to your enjoyment and enhances your understanding of a
rather complex and sometimes confusing industry.

Kind regards

Mauro A. Forlin
Mauro A. Forlin
(N.Dip)(MIFM)(AFP)(CAAUT)
Senior Technical Adviser
Global & Local Financial Consultant (Pty) Ltd.




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