Companies offer different premium patterns for the financing of life cover. In the following, I am going to discuss the two above-mentioned premium patterns and their implications on long-term insurance planning.
Before I get into further detail, please take a few minutes (7 minutes, to be precise) to watch the below video:
Compulsory Age-Related Premium Patterns work as follows:
Firstly, it is important to note that age-related premium patterns are based on age bands or groups. Secondly, age-rated premiums involve compulsory premium increases each year – even when you have no cover increase on your policy. If your policy has a voluntary annual cover growth facility included, then you will pay for the increase in cover plus an additional compulsory increase, according to whichever age band you fall into.
The implication of having age-related compulsory increases is that younger individuals experience smaller compulsory increases, while older individuals experience far greater increases in premiums. Below is an excerpt from a company’s technical guide, disclosing the compulsory increase percentages for the various age bands:
Up to 29
30 to 40
41 to 50
51 to 66
Are Age-Related premium patterns ever a good choice?
Absolutely – if you are planning on taking out a policy to cover your liabilities for a specified period – for example, a 10-year period – then taking a policy on an age-related premium pattern is going to be the most cost-effective choice for you.
However, if the purpose of your policy is to keep it in place for the remainder of your life, then the most cost-efficient choice would be to take up a level premium pattern. Examples of this include taking out cover to provide for your estate duties or to leave an inheritance for your children; these are not policies you want to be cancelling at any point during your lifetime!
Level Premium Patterns work as follows:
A policy structured on a level premium pattern will start with a specific premium and will:
- Never increase if you have no cover growth on your policy
- Only increase by a small percentage to accommodate for the increase in cover, when you opt to have annual cover growth on your policy
Who should choose a level premium pattern?
The easy answer here is, almost everyone! As noted above, if you’re planning on keeping your cover in force for the remainder of your life – whether to cover the cost of estate duties, leave an inheritance to your spouse/children – then a level premium pattern will be the most cost-effective option available to you.
Many people will argue that, by the time they retire, they will no longer be able to pay their premiums. The easiest solution here is to let your grown children pay for the premiums and allow them to inherit the lump sum in proportion to how much of the premium they pay. This will be a valuable investment for your children, which will ease the burden of their retirement planning substantially. Quite simply, there is no better investment that can be made for your children.
That’s great… but can’t I simply take up age-rated cover now, save on my premiums and make the switch to level in a few years’ time?
As far as arguments go, this is one we hear often – from advisors and clients alike! Many people argue that they would prefer to “spend less now, to save money” and make the change later when their financial situation has improved. The truth is this is not a valid argument when considering all the facts.
Irrespective of which premium pattern you choose, with each year that you get older the cover will cost more to implement (a 25-year-old might pay R342 for R2 000 000 life cover on a level premium pattern, whereas a 45-year-old would pay R826 for the same amount of cover, with the same premium pattern). Changing from one premium pattern to another, will be treated by the company as “new cover” – i.e.: you will be rated according to your age on the date you request the change.
We have, in our experience, seen premiums jump threefold when asking companies for quotes to improve age-related premium patterns to level premium patterns, simply because of the client’s age. Had they taken out a level premium pattern from the beginning, their premium would not have grown to such a large value – they’d have been better off right from the start.
Would I, as an advisor, buy a policy on a level premium pattern?
Absolutely, yes! All my personal policies are structured on level premium patterns, and I would never do it any other way. This is certainly the most logical choice for anyone to make when planning for whole of life peace of mind.