When looking at Life Insurance there are a few questions you should be asking yourself. Are you aware of the different premium pattern options for life insurance? Do you understand how they work? Do you know how much you will be paying for life cover a few years from now?
Readjusting your Premium
You have a policy anniversary every year. This is where your premiums are readjusted based on your premium pattern. Premium change annually based on the pattern, annual cover increases and your age. All premium patterns are available when taking out insurance but trying to change the pattern of your policy once started can be difficult.
Certain premiums patterns are more beneficial for certain age groups or your needs. Another factor that affects the increase of your premium pattern is the annual benefit increase. This is an increase that affects your cover amount and is often either 5% of an inflation-linked increase.
Choosing How Your Premium Increases
You have a choice in how your premiums change each year. Your premium increases can be between 0% up to 31% if you have a fully integrated aggressive premium with Discovery. Generally speaking, the most common premium increase is between 7% and 13%. This increment is chosen to keep your cover amount relevant with inflation. There are 3 common premium patterns: level premiums, 5% compulsory increase premiums and age-rated premiums.
Premium Pattern Options
Level Premium Pattern
The premium itself has no annual increase, however, if you want your benefits to increase each year your premium will increase. The increase should be lower than some of the other premium patterns. The level premium option is generally more expensive.
The first payment is the highest out of the 3 options but it stays constant over the term. This pattern could be suitable for someone who is relatively young, has a secure job and good income. This policyholder should be able to afford the premium in the beginning. It’s applicable to someone who can take a hit for the first couple of years but could then benefit in the long run. The benefit of choosing this pattern always knowing your premium amount. Your premium doesn’t increase unless you have chosen a benefit increase.
5% Compulsory Premium Pattern
The 5% compulsory increase option is when your premium increases by 5% every year. Meaning that your initial premium will be lower but steadily increases by 5% annually for the duration of the policy term. This pattern could be suitable to someone with an occupation that is likely to have steady salary increases. The benefit of this pattern is that it is a constant increase of 5% so you are able to work out how much you are paying throughout the term. If your benefit increases by 5%, the premium will increase annually by 5% plus the cost of the benefit increase to cater for both the benefit increase, as well as, the premium increase. 5% compulsory is more affordable and is considered a mid point between level and the next pattern we will discuss.
Age-Rated Premium Patterns
The age-rated premium has an increase that depends on your age. Increases change in line with your age. So if you’re young, your risks are lower and thus your premium increase will also be low. As you get older, your risk increases and this will increase your premium increase. For someone in their 20s their annual increase could be between 2-4% while someone in there 60s the increase could be between 10-15%.
This could make affordability a problem later in life. The up side of taking out this policy while young is that it offers the lowest initial premium out of the 3 patterns and thus looks the most attractive. Many choose this pattern without fully understanding how much their premium will increase in the future. Each product provider’s cover involves different increases depending on your age. It is best to do your research and fully understand the terms and conditions of this premium pattern before deciding.
It’s important to understand your premium patterns to avoid surprises and confusion in the future. When shopping around for a life product it is vital to understand the way providers measure age-rated increases. Settling on a premium pattern is dependent on many factors including age, personality type, future income, to name a few.
Our number one job as a financial planner is to listen to you, understand your goals and provide the best objective advice. The correct plan will provide peace of mind. Here at Growmatter, we want the best for our clients and we are committed to working together.
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The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us at info@growmatter.co.za
