You don’t wake up every day thinking about life cover, do you? But there will be a day when it’s top of mind and you want to get your cover in place sooner rather than later (usually a life event like the birth of your child or the day you tie the knot). That’s the day you call your broker, or phone a direct insurance company to get a quote. If you are prudent, you will probably phone around and get multiple life insurance quotes before making your decision. Here is the problem – you are going to base your decision on price alone! It’s not your fault, that’s just how we are wired nowadays, and smart advertisers know that. The life insurer that offers you the best Rand for cover deal is probably going to book your policy and collect your premiums every month. What if we told you that basing your decision on price alone could end up costing you more down the line? In this blog post we’re going to look at the not so obvious factors to consider when taking out your life cover policy.
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The premium pattern
Is your premium going up each year, or is it remaining level? Some life insurance companies will have a few premium pattern options available but will probably only quote the lowest premium they can give you.
Why do they do that?
Because they know you are price sensitive and if they can come in a few bucks cheaper that the competition, that’s all they’ll need to seal the deal. If you are not aware of this, you will be swayed by the cheap premium and probably take the policy out.
You need to be very careful of premium patterns that start out cheap and have aggressive yearly escalations. On face value they look like the best deal, but generally work out more expensive over time. The worst-case scenario is that the premiums balloon so quickly that you end up having to cancel the policy a few years down the line and start shopping around again.
Ask the insurer you are getting a quote from, the following questions:
- Does my premium increase year-on-year? If so, by how much?
- Do you have a level premium option?
- Does the cover increase year-on-year?
Does it matter if your cover increases year-on-year?
That largely depends on why you took the life cover out in the first place. If you are covering a bond (which should be decreasing every year) then it’s not such a big issue. If you are leaving the money as inheritance to your children, then making sure the sum assured stays in line with inflation is a minimum requirement.
How much is R1,000 000 going to be worth in 20 years if it doesn’t keep up with inflation? Maybe R250,000 in today’s terms.
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How long is your life cover guaranteed for?
Insurance companies don’t have a crystal ball and can’t predict the future. They base their life insurance rates on mortality tables (life expectancy statistics). It’s obvious that the advances in science and medicine means people on average are living longer than ever before.
To protect themselves from “what the future might hold”, life insurance companies cannot afford to grant you the life cover in your policy without reviewing the pricing sometime down the line. The period before the review is called the “guaranteed term”.
All of this is contained in the policy wording that very few of us take the time to read.
Simply put – at some stage your life insurer is going to review their pricing and they might hike your premiums. This isn’t an annual premium increase hike, it’s a price review of sorts.
How long is my life insurance pricing guaranteed for? You need to ask your insurer this before taking out the cover.
It’s not all doom and gloom though. Most insurers will have a clause that their pricing is reviewed after x amount of years, but they will also provide you with a guarantee that the hike (if any) isn’t more than a specific percent.
Remember that insurance companies need to remain competitive. If they price themselves out of the market, they risk losing policyholders, and that is bad for business, considering the significant cost in marketing and operation expenses it takes to put the policy on books in the first place.
Don’t get us wrong, price plays a huge part in your purchasing decision. We are just asking you to make sure you ask a couple more questions at quote stage. In fact, just two:
- Does my premium escalate year on year and what is the impact of that 10 years down the line?
- What guarantee term is in place before you review your overall pricing and what cap is put on that increase?
Until next time.
The Wise About Life Team
