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What Makes Up Your Insurance Premium?

Author: Sherryn de Vos
Date: 2017-04-25
Do you know what exactly you are paying for with insurance? We uncover just what makes up that monthly premium!
Insurance is seen as a grudge payment by almost every person who forks out a monthly premium. Whether it be life, car or home insurance, an amount gets deducted every month, and, for the majority of us, we simply do not know what gets included in the insurance premium. When signing for insurance, we are all aware that we agree to a certain amount that is deducted off monthly. We also agree to a certain amount of excess. And, even though most of us know why we need to pay an excess, should we claim, we have little to no idea what makes up the figure. We thought we would look at what makes up a monthly premium and how your monthly contribution is divided.

Broker Fees And Commission

According to the Financial Intermediaries Association of South Africa (FAIS), brokers are legally obligated to disclose their commission, as well as their fee structure. Should you be signing for cover with a broker, you have the legal right to be fully aware of what the broker will be pocketing in the transaction.
The Short Term Insurance Act states that “An independent intermediary shall not charge, in addition to any remuneration contemplated in Section 48, any fee which is payable by a policyholder, unless the amount thereof is disclosed expressly and separately to the policyholder by the intermediary.”
The Act goes on to state the following. The fee must:
  1. Be specifically agreed to by the client in writing;
  2. Be disclosed;
  3. Not be a duplication for which remuneration has already been paid (commission or binder fee);
  4. Be reasonable for the service/s provided; a
  5. There should be no barrier to exit from this fee on the part of the client.
So, just how much is a broker allowed to charge? According to the Act, a broker's commission can be charged at 12.5% for motor business and 20% for other business. A broker is also allowed to charge a flat-out broker fee, which also needs to be legally disclosed to the client. Should you be going directly to an insurer, the lines become somewhat fuzzy on what you are paying for. Due to the fact that there are no brokers involved in the process, there are no broker fees and commission. The insurer does, however, have to pay the call centre agents that have sold you the insurance.

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Other Costs In Premiums

A premium is also made up of several other costs.

Base Premium

The base premium is calculated on your risk profile, which is established by your insurer or the broker. A base premium can increase or decrease based on your lifestyle and financial position. In most cases, a broker will be able to establish a more accurate estimate of your base premium than a direct insurer. This is due to the fact that a broker can work out a more accurate risk profile for you.

Taxes And Levies

The only thing in life that is guaranteed is death and taxes. All insurance claims include a taxable amount, however, according to the Value Added Tax Act No. 89 of 1991, long term insurance is exempt from tax.   Can you claim back from your tax? Read more here!

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