Weaker rand sparks renewed interest in hedged life insurance
The sharply weaker rand has sparked renewed interest in life insurance policies that are hedged against falls in the local currency.
Herschel Mayers, Chief Executive Officer of Discovery Life, says that the idea of being able to hedge falls in the rand by linking a payout to international currencies and indexes like the US dollar, the S&P 500 and the FTSE 100 was developed when the rand started to show signs of weakness in 2000.
â€œWe saw a lot of demand for this kind of product in 2001 when the rand collapsed and people wanted the comfort of knowing their dependants would have access to benefits that wouldnâ€™t be eroded by a volatile rand.
â€œAnd now with the recent weakness in the rand, South Africanâ€™s are around 25% poorer in dollar terms than they were just four months ago; so many people are again opting to choose a life policy that will preserve its value in global terms.â€
Premiums of linked life insurance typically cost between 10% and 15% more than an unlinked product, depending on the â€˜linkageâ€™ option chosen.
For example, the Discovery Global Aggressive Portfolio is made up of approximately 10% in US Dollar cash deposits, 50% in the S&P 500, 25% in the EUROSTOXX 50 and 15% in the Nikkei 225.
The Discovery Global Moderate Portfolio is made up of approximately 45% in US Dollar cash deposits, 31% in the S&P 500, 15% in the EUROSTOXX 50 and 9% in the Nikkei 225.
â€œPremiums and benefits payments are always in South African rands, irrespective of the currency of linkages selected. This is required by South African law.
â€œHowever, benefit payments will reflect any rand appreciation against the currencies or the various linkages, however, the payments will never reduce below the Original Rand Value, increased by inflation.â€
Mayers notes that many investors diversify their wealth through prudent rand hedging and that life insurance should be viewed in the same way.
â€œPeople are again are buying rand hedge stocks and focusing on how to protect their payouts and buying power in a softer rand environment.â€
Says Mayers: â€œWhen the rand started to strengthen as it has done in the past few years people took the view there was no need to take out these kinds of products, but we are now again experiencing a surge in demand.â€
Mayers warns people to consider switching to a linked product only after considering their wealth and reviewing their personal balance sheets.
Beachhead Media & Investor Relations
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