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Affordability is a key part of most people’s thought process when buying life insurance. However, while it is important to have premiums that you can afford today, it is also essential that your premiums remain sustainable in the future to ensure you can keep your cover.
Clyde Parsons, chief innovation officer at BrightRock, says premium funding patterns play an important role here. “Premium patterns are how your life insurance premiums increase each year to fund your cover to the date you choose for it to end. While in the past, clients did not have many options when it came to selecting a percentage by which their cover would increase yearly, this is changing.
“Today, you can choose premium increases in increments of 0.5%. For example, you can choose for your life insurance premiums to increase by 6.5% each year.”
He says typically most clients choose for their premiums to increase each year as this is more affordable and because the cover amount usually also increases each year. “However, it is not a requirement that premiums increase annually.
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“You can have a life insurance policy that has a premium that stays constant or level. If you choose cover that grows each year while the premium stays the same but with this option, the starting premium is a bit higher than what it would have been had the premium also been set to increase.”
Parsons says it is important to discuss the premiums on your life insurance with your financial adviser. “It is critical to ask about the exact percentage the premiums will increase by each year, as this is often not the same as the name of the increase you choose.
“Also check if the premium increases are consistent, predictable and clearly disclosed – in other words, do you know exactly what you will pay for your life insurance in the next few years? Some insurance providers transparently disclose premiums in the quote and offer premium guarantees (for the entire increase percentage) of up to a decade.”
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How should you choose an annual premium increase? Parsons says once you and your adviser have decided on how much cover you want to match your needs and how long you need it for, you must decide how you pay for it.
“Choosing how your premiums will increase each year is a trade-off between initial affordability and long-term sustainability. For the same cover, a premium that starts out very cheap will increase more aggressively and make up a bigger and bigger share of your wallet over time than a starting premium that is slightly higher, but with more affordable increases in the future.”
He says you can think of the aggressive increases like a balloon payment for a car that reduces the premium today, but you will pay for it later.
What are your options when your insurance premiums become unaffordable? Parsons says this depends on the current state of your health. If you are still in good health you have more options since you can consider moving or upgrading your cover and changing not only to the latest technology and updated cover, but also to a premium increase pattern that will not run away with you.
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However, if your health significantly deteriorated since you got your cover, you might be uninsurable, which means that you cannot get a new underwritten insurance policy or if you can get cover, it could be at a high premium and have exclusions for conditions you have been diagnosed with or are suffering from.
In this case, he says, moving providers may not be an option. “You can make changes to your policy to make it more affordable. This would include reducing cover, changing the premium funding pattern to make it less aggressive and reviewing your cover to see which elements you still need.
“When your life insurance reducing cover, remember that you might not be able to increase it later in your life if your financial situation improves, which could result in you not having enough cover to meet your needs. An independent financial adviser can help you to understand your options and the cover available at a range of different providers.”
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