BASIC TERMS & CONCEPTS

BASIC TERMS & CONCEPTS: SAVINGS What is fund value? ■With our savings policies we do not use the term cover because when you save you are creating wealth rather than protecting it. ■The value of the fund is the sum of the accumulated net premiums and all the applicable bonuses at the time of death/maturity, less any part-withdrawals taken. What is a part-withdrawal? ■One part-withdrawal may be made within any 5-year period. The customer has to wait for 5 years for the first part-withdrawal and there must be 5-yearly intervals between all consecutive part-withdrawals. ■The maximum amount for a part-withdrawal will be 100% of the fund value and the minimum part-withdrawal amount is R300. ■After a customer made a part-withdrawal, they must continue paying their premiums for the policy to remain active. 1 It might not advisable to do part-withdrawals from a savings policy as it will reduce the maturity value of the policy.

BASIC TERMS & CONCEPTS: SAVINGS What does it mean to surrender a savings policy? ■Surrendering a savings policy means to stop paying premiums and receive a surrender value. A surrender value is available immediately after payment of the first premium. The surrender value is equal to the value of the policy at the time of surrender, less a charge. ■After a customer surrenders a savings policy the premiums will stop and he policy will cease. ■A customer can choose to surrender a policy or it could surrender automatically. It will surrender automatically when the customer stops paying premiums, the Premium Holiday Benefit is exhausted, the Grace Period used and the value of the fund is lower than the minimum paid-up value. 2 It might not be advisable to surrender a savings policy as there are penalties involved and because the customer did not save for the full term selected, it could result in him/her not being able to achieve the goal that he/she initially started to save for.

BASIC TERMS & CONCEPTS: SAVINGS How will a savings policy become paid-up? There are 2 ways for a savings policy to become paid-up: Requested ■A customer requests for his/her savings policy to be made paid-up. Automatic ■A customer stops paying premiums, the Premium Holiday Benefit is exhausted, the Grace Period used and there is at least R1000 in the fund value after charges are deducted. 3

BASIC TERMS & CONCEPTS: SAVINGS What is compound growth? In most basic terms, compound growth means to earn growth on the invested amount plus prior growth earned. Example: ■10% growth on R100 = R10 ■R100 + R10 = R110 (Growth Added) ■10% growth on R110 = R11 (Growth earned on increased amount) ■R110 + R11 = R121 (Growth added) 4

BASIC TERMS & CONCEPTS: SAVINGS What is ACI? ■ACI stands for Annual Contribution Increase. The rate of API is determined by Old Mutual and based on inflation but subject to a maximum legal limit. The maximum legal limit is currently 20%. ■ACI will come into effect on 1 July every year provided the policy has been in force for more than 6 months. Customers will be advised in April each year of the premium increase and the increased deduction will be from a customer’s June salary. ■A customer has the option to skip ACI but they have to do so in writing every year on the 1st of April that they want to skip the increase. It is your responsibility as an adviser to educate your customers regarding the importance of ACI in that it aims to counter the effect of inflation. 5

What will the illustrative fund value be for a customer that saves R100 per month for 8 years at a 4% growth rate? R If a customer invests a level R100 per month for 5 years at a 6% growth rate what will the projected value be? R7000 Your customer invests R100 per month that increases each year with 5%. What will his contribution be in year 25? R323 Growth illustrated BASIC TERMS & CONCEPTS: SAVINGS 6

What is Reduction in Yield? The extent to which the return earned on assets is reduced due to expenses charged against the policy. Example: ■If the total return earned is 15% and the reduction in yield of a policy is 3%, then we declare a net return to the customer of 12 %. ■15 – 3 =12 ■ The lower the reduction in yield, the better value the product offers the customer. 7

BASIC TERMS & CONCEPTS: SAVINGS 8 Reduction in Yield Long term investment plan with an initial premium of R200 after 18 years. 4.00% Single premium investment plan with an initial premium of R after 7 years. 3.00% Education plan with premium waiver with an initial premium of R550 after 13 years. 4.20% Retirement plan with an initial premium of R175 after 10 years. 4.70%

BASIC TERMS & CONCEPTS: SAVINGS What is the Code on Policy Quotations (COPQ)? No projected/illustrative values may be quoted. This includes: ■Maturity ■Income ■Death ■Disability ■Part-withdrawal ■Surrender What can you show to customers to help them make an informed decision? ■The historic fund performance. (Refer learners to the pink pages in the Rate Book) ■A standard document that illustrates the effect of compound interest and the effect of premium increases. (Refer learners to the pink pages in the Rate Book) 9

BASIC TERMS & CONCEPTS: SAVINGS What is inflation? ■Inflation is the rate of increases in prices of goods and commodities. This means that the prices This means that the purchasing power of money decrease over time. The Rule of 72 By using the Rule of 72 calculation we are able to calculate how long it will take for money to lose half its value. The formula is following below: ■72 ÷ inflation rate = number of years 10

BASIC TERMS & CONCEPTS: SAVINGS Example 1: If the prevailing inflation rate is 6%, how long will it take for money to lose half its value? ■72÷ 6 = 12 (years) Example 2: If the prevailing inflation rate is 9%, how long will it take for money to lose half its value? ■72÷ 9 = 8 (years) The higher the inflation rate the less time it will take for your money to lose half its value. 11