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Are your annual life premium increases killing you?

Converting your cover to a level premium makes sound financial sense as it ensures long term affordability.

In our role of assisting clients with their retirement planning and ensuring the long-term affordability of their risk cover we regularly see the situation where clients cannot afford the high annual premium increases on their life policies. This is particularly so from age 50 and above.

The situation is exacerbated in this tumultuous time of Covid where consumers disposable income has often been reduced by salary cuts or not getting a salary increase and cost of living increases such as the increase in fuel, water and electricity tariffs place a strain on your budget.

You need to secure cover which remains affordable when you are retired. This is for your life insurance and particularly so for severe illness cover as it is in this life stage that you are more likely to experience events such as a heart attack, a stroke, a bypass or cancer.

Across the industry, life insurance companies cost life insurance policies in a similar manner. These are called premium patterns and work as follows:

  • Level cover: This is the most expensive initial premium but ensures long term affordability. If you want a risk cover for life, you are better off taking this option now as it ensures you can afford to pay the premium as you get older.
  • 5% compulsory escalation: This is where the premium escalates at 5% per annum without a cover increase and on average is cheaper than a level premium pattern for seven years.
  • Age rated: This this is the cheapest initial premium, and the annual increases are similar across various insurers. This gives young consumers the highest cover for the lowest premium but long term it becomes more expensive. Typically, premium increases are 3% between ages 30-40, 5% between ages 40-50 and compounding to between 8% and 10% from age 60 plus.

This becomes unaffordable particularly when you are retired.

Voluntary cover growth

In addition to the above clients often have an automatic cover increase of between 3%-5% per annum.

The outcome of the above two factors and particularly when a policy is age rated is that the annual premium increases are between 10-12% per annum. At 12% per annum premiums are doubling every seven years. This is best illustrated by the following practical example:

Mr Client is an engineer aged 58 and his wife is 57 and she is a bookkeeper. They do not smoke.

  • They each have R2 million life cover and R500 000 critical illness cover. They have R400 000 of debt and are more concerned about reducing long term costs so they can afford to retire when he is age 65.
  • They are currently on an age-rated premium pattern with a 3% annual cover increase. The current monthly premium is R3 495.24. If they convert their policy to a level premium now the level premium increases to R4 719 per month. If we remove the 3% cover growth the age-rated future premiums increasing at 9% per annum will be as follows:
Age Age Rated Premium Level Premium
59 R3 495 per month R4 719 per month
62 R4 526 per month R4 719 per month
65 R5 861 per month R4 719 per month
70 R9 018 per month R4 719 per month
75 R11 584 per month R4 719 per month
80 R17 824 per month R4 719 per month

Important considerations:

  • The above scenario illustrates that the benefits of a level costed premium. The reality is that if this is not done based on affordability you are likely to cancel or reduce your cover at the time of your life when you are likely to need it most.
  • The younger you are when you have a level cost premium pattern the better off you will be in the long term. As advisors, we can very seldomly offer a client more affordable cover on a level policy that is older than five years.
  • Conditions vary with each insurance company. As a general rule, you can convert your existing cover to a level costed premium. This is typically subject to medicals so if your health has declined new cover may be subject to loadings or exclusions. The best advice is do not cancel any existing cover before you have new cover in place, and you have investigated suitable options for your cover. 
  • Once you have a level life policy, we recommend that you have a voluntary increase in cover so that your cover grows annually. You must be able to stop this voluntary increase at any time if you find that the cover or premium is affordable and in line with your needs.
  • Due to the impact of Covid, we do anticipate an increase over time in the cost of life insurance. As an industry, we have seen significant increases in group schemes where premiums are reviewed annually and in some instances, the increases have been as high as 30%.
  • Most life policy rates are initially guaranteed for 10 years and thereafter if the insurer has poor claims experience, they are on average able to increase premiums by up to 20% and thereafter review this every five years. Some policies have premiums that can be reviewed annually which is not recommended.

Converting your cover to a level premium makes sound financial sense as it ensures long term affordability. Now is the time to review your risk cover and to secure a long-term affordable rate with a reputable insurer. Be sure to consult a professional financial advisor for sound advice that ensures your cover remains affordable as you get older.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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