Discovery are well know for developing products that push the envelope and break away from the traditional way of structuring their products.
However there are a number of reasons for concern with their new product and I recommend that before one decides to sign a contract with them, be aware of the following:
It is an extremely complex product with regards on how to get the best guarantee, tax and investment option. You or your Financial Advisor will have to look closely at the calculations involving your cash flow, the cost, the taxation and time value of your maoney beforehand.
As with all Discovery products many of the benefits are conditional on your taking out of additional products from the Discovery stable of products (Life and Health).
For example, to receive bonuses in retirement, you are required to have a
Discovery risk life assurance contract. From your retirement date, your risk benefits reduce at a rate of between two and eight percent a year, to a minimum level of 50 percent of the risk benefit. At the same time, your premiums are maintained at the same level.
If you select the guaranteed investment options you must also buy life risk assurance.
To me, anything that is dependent on anything else which can see you penalised over the long term either by loss of benefits or any other penalty is not generally a good idea.
However, the novel part of the life cover conditionality is that Discovery is flipping the reducing part of your life assurance risk cover benefits in retirement back into untaxed retirement income (you do not pay tax on income from a life assurance policy).
The calculations are far too complex to explain in detail but involve reducing the life risk benefits by a maximum of four or eight percent a year (ie if you die your heirs will receive a lower payout).
What Discovery is claiming is that by doing this you will maintain sufficient cover while receiving a higher income than you would if you simply used the money you would pay in premiums as income.
However, you must take into consideration whether you do need the life assurance cover when you retire. If you do not need any life assurance risk cover at that stage, then it will probably be better to simply use what you would have spent on the life assurance premiums to supplement your income.
Another innovation, which again is conditional on having life risk cover in retirement, is the accelerated pension payments you will receive if you are in ill health and can be expected to die sooner.
There are currently products, called enhanced annuities, that pay you a higher pension because you are expected to die sooner. But they are only available at actual retirement date and not if you become ill later in retirement. The other problem for companies offering this product is that they have to reduce the pensions they pay people expected to live longer. The healthy in effect to subsidise the unhealthy.
Discovery overcomes both the risk cross subsidisation problems and pays the enhancement at any time in retirement by making use of the conditional life assurance risk cover. In effect you are being insured for ill-health.
Another, worse example of the conditionality linked to the product, is a First National Bank (FNB) tie up, which provides you with a rebate on your home loan repayments, provided you are a member of the Discovery's loyalty programme.
This in turn requires you to be a member of the Discovery loyalty programme, Vitality, (which has a membership fee), and which depends on you having a Discovery Life Assurance policy or being a member of Discovery Health Medical Scheme. And, obviously, you will also have to sign up for the retirement product if you want to boost your retirement savings.
With its new early surrender penalties structure, Discovery Life, has moved away from the confiscatory early surrender penalties applied to traditional life policies. However, the structure is still not perfect.
What Discovery has done is alter the structure so that you pay a penalty of 10 percent of your accumulated savings if you surrender at any time, with the exception of the last five years.
It scales down the penalty to five percent in the two to five years before retirement and to two percent in the last two years.
This structure is great news for anyone in the early years of saving through a life assurance policy because currently if you reduce or stop your premiums where most or a solid percentage of your savings will disappear into the coffers of a life assurance company under the existing system.
But it is not great for you if you are forced to reduce premiums further down the line.
In effect, Discovery has proposed a cross-subsidy for people who surrender early by those who maintain their contracts for a longer period.
If you have held on to your policy for a number of years, you are going to be far worse off in rand terms than you would be under the current system where the surrender penalty is calculated on a pro-rata basis.
For example, say you have a contract period of 20 years and after three years your accumulated savings are at R35 000 but after 14 years and 11 months they are worth R300 000. If you cancel your policy after three years (with the current surrender penalty system used by life assurers), you will probably lose more than R25 000.With Discovery Life you will only lose only R3 500. But after 14 years, you will be penalised significantly less by traditional life assurers than the R30 000 Discovery will take.
There are also no surrender penalties on the risk life assurance part of the product. With traditional universal policies, the costs of the risk part of the policy are added to the confiscatory penalties. With Discovery, your risk cover is treated as a separate policy from your investment policies.
With the retirement annuity side of the product, Discovery still insists that you must be contractually obliged to pay premiums until a minimum age of 55.
All life assurance RA contracts should be modelled on the RA unit trust products, such as those sold by Old Mutual Unit Trusts and Allan Gray, which are open-ended and where you can increase or reduce the payment of premiums without any penalties.
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ou will still need expert advice and real understanding in mixing and matching the different elements of this product to meet your particular needs.
