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Is Your Life Cover Becoming Too Expensive?

Have you looked at your life insurance premiums and thought ‘I can’t afford to keep up with these annual increases?’ You took the policy out 5 years ago and now the premiums are becoming too expensive. Why are the annual increases so hefty? It might be down to the type of increase structure you opted for, when you took out the policy.

Generally, you can choose between 3 types of annual life cover increases:
  • Level Premiums
As the name suggests, the premiums remain level year-on-year so there is no increase. The benefit remains the same and so do the premiums. If you opt for a premium structure like this, then at the very least you know what your premiums are going to be 5 years down the line (no horrible surprises).The downside however is that if your premium doesn’t increase the life cover benefit doesn’t increase either and your benefit is going to be eroded by inflation (the buying power of your pay-out will diminish).
  • % Based Compulsory Annual Increase Premiums
These structures are cheaper than level premiums because the premiums are discounted upfront and they have a compulsory annual increase. It looks great on a quote, but 7 years down the line the premiums might be completely unaffordable. Make sure you factor in what these premiums are going to be, down the line, before you opt for a very large % based annual increase on your life cover policy.

If you look at the example below, you will see the same amount of life cover (R1 500 000) quoted with two different annual premium structures.

• R1 500 000 level premium structure R199pm
• R1 500 000 10% annual increase structure R159pm

Year 1 Year 2 Year 3 Year 4 Year 5
Benefit R1 500 000 R1 500 000 R1 500 000 R1 500 000 R1 500 000
Level Premium R199pm R199pm R199pm R199pm R199pm
10% Annual Increase R159pm R175pm R192pm R212pm R233pm

Now at first glance you would immediately be looking to go for the R159pm option. It is after all significantly cheaper than the level premium structure.

But look at the impact the 10% annual escalation has on the premiums. By year 3, the premiums are almost the same and by year five the 10% annual increase premium is much more expensive than the level premium. So you will be scoring with the 10% annual increase premium upfront, but losing out down the line.
  • Age Rated Premiums
Age rated premium structures work much like % based increases except they work in age bands and not fixed annual increases. Your benefits work out really cheap when you are younger but as you get older the premium hikes are really hefty.

Questions you should ask yourself before deciding on which annual premium structure is right for you
  • How long do you plan on holding onto the life cover?
  • What can you afford now, and what can you afford down the line?
  • Does the life cover amount need to increase year on year, or does it need to reduce?
Make sure you request quotes with multiple premium structure scenarios so you can see the impact each one has over time.

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The iHound