A topic that comes up in nearly all conversations that I have with clients and potential clients is the matter of “level” premiums for their insurance policies. I am an unashamed fan of a level premium structure for Income Protection, Life, TPD and Trauma premiums, however, I also strongly believe in utilizing this premium structure at an optimal time for the various types of cover (I will go into this in more detail in a future blog). I would like to start with getting the basics right… Are all level premiums the same? NO, they are not! No wonder some people have trouble making a decision on taking out an insurance policy when there are so many seemingly conflicting facts around what sounds like a pretty simple principle.
Level premiums are usually explained to clients along the lines of the following, “stepped premiums are cheaper when you take the policy out but increase every year as you get older and eventually become very expensive. Level premiums are more expensive initially but remain at the same level for the life of the policy so in the long run, are much cheaper!” This makes sense and so most people will opt for the better long term decision and go for level premiums
Getting back to my original question, are all level premiums the same? No and the devil is in the detail. The difference is best explained in the following example:
- Level premiums
- Say, for example, a 30 year old takes out an Income Protection policy for a sum insured of $10,000 per month on level premiums. On the next years anniversary date, the insurer will increase the sum insured by $300 per month to keep pace with inflation. That $300 per month increase in cover will be calculated on level premium rates for a 31 year old and so on each year after that.
- “True” Level premiums
- The same 30 year old takes out an Income Protection policy for a sum insured of $10,000 per month on “true” level premiums. On the next years anniversary date, the insurer will increase the sum insured by $300 per month to keep pace with inflation. That $300 per month increase in cover will be calculated on level premium rates for a 30 year old. Each years increase in the sum insured will continue to be calculated at the entry age that they took the policy out.
- Don’t think it makes much of a difference? The level premium rate for a 50 year old is huge! As an example, I recently did the premiums projections for a 32 year old client who had a policy that didn’t have “true” level premiums and compared them to “true” level premiums over a 30 year span:
- At age 62, the projected premiums for the standard level premiums were circa $15,000 per annum.
- At age 62, the projected premiums for the same sum insured on “true” level premiums were circa $8,000 per annum!
Only 4 insurers in Australia offer true level premiums:
if you aren’t sure which one your policy is, please get in touch for an obligation-free review of your cover at firstname.lastname@example.org or 07 3382 6723