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The truth about life insurance cashbacks

13 February 2023
6 minute read
Woman looking at laptop concerned

Getting your premiums back (tax free) after 10 years of paying your life insurance policy each month sounds attractive. We could all do with some extra cash! But how do cashback bonuses on life insurance policies work and do they add value?

We looked at 8 different life insurance companies offering some kind of cashback on life cover policies and found:

  • You may get good value for money – but there are no guarantees
  • You can end up paying for a benefit you will never receive

Because there are no guarantees, it pays to be wary of cashback bonuses, especially when you have to pay extra for them. Always work out if they are worth it before you sign up.

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Three different kinds of life insurance cashbacks options

Cashback included automatically

These policies, and there are only a few of them, offer a cashback, equivalent to some or all of the premiums, that is paid after a certain time, such as 10 years. You cannot opt to include or exclude the cashback – it is built into the policy and premium.

Example: R1 million life cover for a premium of R700 a month, if there are no claims in 10 years 60% of the premiums paid will be paid back to the policy owner.

Cashback for an extra premium

These policies allow you to take a cashback bonus as an additional benefit on your policy for an extra premium. At some point in the future you should be paid all or a percentage of your premiums as a cashback.

Some of these policies pay a cashback once after a time, say 10 years, others pay a cashback at regular intervals, such as every 5 years.

Example: R1 million life cover for R600 a month premium with the option to include a cashback benefit at an additional amount, say R210. If the cashback benefit is taken, 100% of premiums (R810 x 12 months x 10 years) will be paid back in 10 years.

Cashback linked to a reward programme

These offer a cashback that is usually equivalent to a portion of premiums, such earning a cashback of 50% of premiums paid after a certain time, depending on how actively you participate in the rewards programme. Participate to the maximum and you can get a high percentage of premiums paid as a cashback.

Example: R1 million life cover for R550 a month, cashback benefit linked to rewards programme that costs R250 a month. Total payment R550 + R250 = R800 a month.

Cashback paid in year 5 of 60% of premiums paid (R19 800), if certain goals are achieved on the rewards programme, for example xx number of points.

Is life insurance cashback worth it?

Not if there is a claim on your policy

For example: You pay an extra R100 a month for cashback in ten years in addition to R650 a month for R1 million life cover. If you pass away in year 9, your policy will pay the R1 million life cover, which means you have paid R100 a month extra (over R10 000) and have no return on this or return of the amount paid. This is paying for a benefit you may never receive.

The exception is if your cashback is linked to a rewards programme that pays back whether or not you claim.

Top tip: Always read the fine print and don’t assume you won’t claim in 10 years even if you are healthy. Anything can happen.

Not if you cancel your policy or it lapses

Because insurance is a risk-based product, you will not get your premiums or your cashback amount back if you cancel your policy or it lapses. Again, you may be paying extra for a benefit you will never receive.

Not if it makes your life insurance too expensive

One insurer has calculated that opting for a cashback benefit increases the premium by 12.5%. If the cashback is automatically included, you may end up paying more than you can afford for life insurance or taking less cover than you need because there is a cashback benefit included in the premium. Rather focus on the amount of cover you need and pay for that first.

Not if you can get a better return for the extra amount you pay

To work out if you can get a better return you need to compare the amount you pay for the cashback to the amount you will receive as a cashback bonus, and the amount you could have gotten if you invested that amount in a savings or investment account.

For example, if your life cover costs R500 a month and you also pay R200 a month for a cashback offering 60% of total premiums in 10 years, you will receive R50 400 in 10 years. This is a return of around 13% on your “investment” in the cashback. If you can find an investment offering a higher return, such as a unit trust fund, you are better off putting your money in the unit trust. Of course, if you claim, you lose all the money you paid for the cashback bonus, in which case the unit trust is definitely the better option.

Yes, if you get good benefits on a rewards programme

If you actively participate in the rewards programme you can get a cashback as well as other benefits from various reward partners, such as discounts on food, clothes, travel and gym memberships. But you have to participate actively and consistently. These plans also offer regular incentives – so you won’t wait a decade or more for something back.

Always do the maths on these programmes to see if the premium for joining the rewards programme is worth it. For example if you pay R250 a month, receive a cashback of R5 000 in year 2, as well as discounts on groceries, cheap local flights and accommodation for a holiday, and cheap gym fees (all from the programme’s reward partners), you should receive good value for the R250 you pay.

However, if you don’t use the reward partners, or are an infrequent participant, you may end up paying for benefits you don’t use and not getting as high a percentage cashback as you would like. Effectively you may end up overpaying for life cover.

The positive side to these programmes is that you can cancel membership of the rewards programme easily, usually with a month’s notice, without any effect on your life cover or premium.

Comparing options can be difficult

Each of the cashback plans have their own unique terms and conditions, and sometimes each contract will have specific terms and conditions relevant only to that policy. This means you must understand the terms and conditions completely before you can work out if a cashback is a good option or not. 

If you need life cover it makes sense to first look at how much cover you need and how much that costs, and only then consider any additional benefits or extras you may take. Remember you can always ask your financial adviser for assistance, and if you have any questions such as the ones we’ve listed below, the insurance company must answer them to your satisfaction.

Cashbacks are not taxed, currently, but there is a chance that this will change. This will have a bearing on how worthwhile the cashback is to you.

The bottom line

There are cases where you may benefit from a cashback, but there is no guarantee you will get the cashback in future. So, while some may benefit from a cashback, not everyone will, and some will end up paying more for life cover than they need to. It makes more sense to keep life cover and investments as two separate plans and policies. 

Questions to ask when you are deciding whether or not to take a cashback option

  1. How much does the option cost?
  2. Can I cancel it at any time?
  3. If the cashback is paid, does my sum assured stay the same?
  4. How much will I get paid and when?
  5. What happens if my policy lapses and is reinstated?
  6. What are the terms and conditions of the contract and can these change?
  7. What are some of the cases where I won’t get the cashback?

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