Why insurance premiums
Insurance in all areas provides security, incentives and peace of mind. In many ways Life Insurance is the ultimate insurance in providing for future needs, but plan wisely. Life insurance should not primarily be about the cost, but about the purpose. Even if you have taken the time and effort to implement an insurance strategy, no one likes to pay the premiums, especially when they start to skyrocket at a point in your life when it is potentially needed the most! Below are some points to consider that could help to alleviate premium blowout.
Always wise to start early
At a young age you have less chance to build up ‘Risk Baggage’ (health issues or poor lifestyle choices) which may impact your policy by adding a loading (premium increase) or exclusion (narrowing the scope of coverage).
The sweet spot (the cheapest time to commence cover) is 27-28 years of age. Prior to this, risk taking is likely to be more significant, and therefore priced into your insurance policy. After this age you are on your way to building up your ‘Risk Baggage’.
Structure premiums appropriately
Generally there are two types of premium structure, stepped and level. Stepped starts out relatively inexpensive but increases as you age and become more of a risk. In your late 40s and 50s the rate of change can be quite steep (10%+ increase p.a.). On the other hand level premiums, although not guaranteed, should remain consistent through the life of the policy (if no indexing is applied). Although more expensive initially (compared with stepped premiums), they become comparatively cheaper over time.
Either structure can be utilised for a specific purpose:
- A stepped structure may be more suited to shorter or medium term needs – such as a policy to cover your debt obligations (which should hopefully be reducing over time).
- A level structure (such as an income protection policy) may be more appropriate for longer term requirements – such as protecting your ability to earn income.
Life insurance has a ‘Breakeven Point’, where the cumulative stepped and level premiums cross. This is your point of reference for determining the appropriate premium structure. If the timeframe of the cover is less than this, you should consider opting for stepped cover and choose level premiums if the timeframe is longer.
Life insurers in the past have focused on punishing negative behaviour which increases the life insured’s risk profile (i.e. smoking). This may be done by either applying a loading or exclusion or, potentially, refusing cover altogether.
This still occurs, however in recent times life insurance offices have recognised the benefits of encouraging active and healthy lifestyles by offering Health & Wellbeing programs. Members of these programs partake in activities (such as clocking up a certain number of steps per day and pilates classes) which improve and promotes better health. In return for doing this they are rewarded with premium reductions and other benefits such as discounted gym memberships and wellness retreat vouchers. This has created a more sustainable business model with evidence of these programs showing reduced policy lapse rates and less claimable events occurring.
Be wise – choose wisely!
Although life insurance cover is important, simply having a policy is not, in itself enough and all that you may require to meet your needs. You need to be wise and also ensure you have an adequate amount of cover in place for your personal financial position. Seek advice. While this may seem daunting, imagine possible future scenarios. For example, what might you do if your spouse passes away? Might you decide to sell the investment property you hold to eliminate an outstanding debt? If you do there may be no need for your life insurance policy to be structured to offset the current loan for that investment property.
There are many factors about your current and future financial position, as well as your risk appetite, that need to be considered when looking at whether your current insurance cover, or lack there of, is appropriate.
DISCLAIMER: GENERAL ADVICE ONLY
The information provided in this blog is general in nature. It has been prepared without taking into account any person’s individual objectives, financial situation or needs.
Before acting on any information in this blog consider its appropriateness to you, having regard to your objectives, financial situation and needs, or seek professional advice from a financial advisor.
Accru are not recommending specific investments or products. Investments mentioned are examples only. For appropriate investing always undertake thorough research. Alternatively, seek professional advice.