Affordability is a key part of most people’s thought process when buying life insurance. While it is important to have premiums that you can afford today, it’s even more essential that your premiums remain sustainable in the future, so you can keep your cover. Premium funding patterns play an important role when it comes to this topic – we answer some important questions that every client needs to understand below.
- In simple terms, what are premium patterns?
In short, premium patterns are how your life insurance premiums increase each year to fund your cover to the date you chose for it to end. While in the past, clients didn’t have many options when it comes 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 premiums to increase by 6.5% each year.
Video (0:48): What are premium patterns?
- Do life insurance premiums increase every year?
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’s not a requirement that premiums increase annually. You can have a life insurance policy that has a premium that stays constant or level (i.e., does not increase at all). With BrightRock, you can even have cover that grows each year while the premium stays the same. With this option, the starting premium is a bit higher than what it would have been had the premium also been set to increase.
Video (1:06): Do life insurance premiums increase every year?
- What should you ask your financial adviser about premium increases?
It’s critical to ask the exact percentage the premiums will increase by each year – this is often different from the name of the increase chosen. You should also check if the premium increases are consistent, predictable and clearly disclosed – in other words, do you know exactly what you’ll be paying 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.
Video (1:05): What should you ask your financial adviser about premium increases?
- How should you choose an annual premium increase?
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’ll need to 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 sustainable increases in the future.
You can think of the aggressive increases like a balloon payment for a car, it reduces the premium today, but you will pay for it later.
Video (1:02): How should you choose an annual premium increase?
- What are your options when your insurance premiums become unaffordable?
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 won’t run away with you.
If your health has significantly worsened since you got your cover, you might be uninsurable (which means that you can’t get a new underwritten insurance policy) or if you can get cover, it could be a high premium and have exclusions for conditions you’ve been diagnosed with or are suffering from. In this case, moving providers may not be an option. You can make changes to your policy to make it more affordable, today and in the long term. 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 reducing cover, please note 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. It’s advisable to speak to an independent financial adviser who can help you understand your options and the cover available at a range of different providers.
Video (1:49): What are your options when your premiums become unaffordable?