April 17, 2010
 By Bruce Cameron
Beware when you take out a loan against your life assurance policy: the normal rules on interest rates may not apply and you could end up losing most of your savings.
The warning comes from Judge Brian Galgut, the Ombudsman for Long-term Insurance, in the case studies that accompany his annual report for last year.
He says that if you have a loan against your life assurance policy, you should assess the loan, seek financial advice and consider repaying the loan to avoid the possibility of paying a lot more in interest than you may have anticipated, particularly as the in duplum rule, which limits the total interest that may be charged to the capital amount of the loan, often does not apply to these loans.
"Interest is often charged at well above prime interest rates on policy loans, and the in duplum rule does not apply to loans granted prior to January 1, 1999," he says.
But Galgut has also told the life assurance companies to behave properly. He says it is a legal requirement for life companies to:
Make you aware, when you take out a loan, that it is a loan, and what the terms of the loan are;
Send you quarterly statements that indicate the amount outstanding on the loan, the accrued interest in relation to the value of the policy and the applicable interest rate; and
Notify you when the loan is about to equal the value of the policy, which will cause the policy to terminate.
It is important that policyholders are aware of the implications of using policy loans, and whether interest is being charged on the loan.
In an example of what can go wrong, Galgut says a complainant, Ms Y, took out a policy in 1988 that had a premium of R80 a month. In August 1992, she took out a loan of R1 818.58 on the policy. In terms of the policy, the insurer could charge interest at a rate in its discretion and change the rate without notification.
Ms Y never repaid the loan. In 2008, 20 years after taking out the policy, she was told for the first time that her loan plus interest had grown to R34 526.60. The net surrender value of the policy was R12 938.
The insurer advised Ms Y that she could repay the loan over the remainder of the policy term of 10 years by paying R551 a month - a total repayment of R66 120.
After Galgut's intervention, Ms Y accepted an offer from the life company to treat the loan as if it had been a partial surrender, in terms of which the gross surrender value of R49 121.68 would be R11 423.16 lower, but the loan would fall away. This increased the net surrender value of the policy from R12 938 to R37 698.
  
 
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