As I mentioned in our chat, I am seeing a LOT of the Income Protection policies for young Dentists being set up on “level” premiums and I have concerns about whether they are best suited to the policy holders needs. Level premiums (as opposed to “stepped” premiums which increase each year with age and inflation) are higher when you take the policy out but are cheaper when viewed on a cumulative basis over the longer term (around 7 years).
I have a very simplistic view on stepped versus level premiums; I am a massive fan of level premiums and recommend them to my clients on a regular basis but, like most things in life, there is an optimal time for them to be utilized.
I look at these policies and the age and financial situation the graduates are in and cannot help but think that stepped premiums would have been better suited to their situation when they took the policies out. My reasoning is that level premiums are more expensive when you take the policy out but are much cheaper over the long term (around 7 years is the time that the cumulative premiums are in your favour); for you to realise the savings, you must hold that policy for around 7 years. In the case of graduates, their income is growing quite rapidly in the first 5 years of practice so there is usually the need to increase the level of cover during that time. As an example, you set up a policy 2 years ago with a sum insured for $6,000 per month but your income has grown and you want to increase your sum insured to a monthly benefit of $12,500; If you wish to increase your sum insured, you must reapply with the insurer and pay the level premium rates of your current age today. You have effectively wasted the last two years of paying extra premiums for no benefit!
My advice to clients is to use stepped premiums until your income has reached its potential and then “lock in” with level premiums. If you are on a stepped premium policy and are happy that the sum insured won’t need to be increased for the foreseeable future, you can change to level premiums without any underwriting so there is no risk to you at all.
If you know someone who is unsure which is best suited for their situation, I am more than happy to discuss this with them!