With life insurance coverage in place, you’re secure knowing your loved ones are financially protected without you there. The sad reality is, however, that many Kiwis are forced to reduce or cancel their life insurance policy after paying premiums for many years, just when the protection is needed.
As you get older, you or your family are generally more likely to make a claim, so insurance providers balance this risk by adjusting premiums, upwards. But your life insurance needs to be affordable so you can still afford to pay for it when statistically you’re most likely to need it.
Are life insurance policies all the same?
Your policy will look different to someone else’s and is why premiums vary. This is another reason why seeking professional, expert advice from an insurance advisor can be helpful.
Quality insurance advice guarantees that you are protected when you need it the most. Skilful, qualified advice also helps you choose the right type of premium for your individual circumstances.
Life insurance policies that don’t increase – they’re really a thing.
Banks and many online insurance companies only offer premiums that increase. They often don’t tell you about the premiums that don’t keep increasing. Therefore, talking to a qualified insurance adviser pays off.
Rate-to-age vs level-term life insurance – what are they?
There have traditionally been two options when taking out insurance: stepped and level premiums.
Rate-to-age or stepped cover
Rate-to-age insurance, also known as stepped cover, is currently the most popular pricing structure for life insurance in New Zealand. Rate-to-age policies and premiums are recalculated every year.
Initially, the premiums are lower, providing immediate and affordable cover. They climb steeply once you attain the age of 60 years as you age. Depending on the life insurance company, premiums rise between 2%-15 % each year. This makes rate-to-age life insurance a more expensive option in the long run. Your life insurance can become unaffordable just when your loved ones are most likely to need to claim.
Level-term insurance
Level premiums, on the other hand, stay the same throughout the life of the policy term. They can be viewed as the opposite of stepped premiums.
Unlike rate-for-age premiums, level premiums remain fixed for a specified period or until a specified age, for example, level for 10 years, level to age 65 and level to age 80 or even up to age of 100 years.
Global finance research has found that a level 100 policy if taken between the age of 30 to 50 years tends to give real value for your money which you pay as a premium in most of the cases. Few exceptions can be there when it is not true.
Level premiums spread the cost of cover over the level period. Premiums are usually higher than rate-for-age premiums in the earlier years because you are effectively paying upfront for future risk.
The initial cost can be off-putting. However, they can work out more cheaply in the long run when compared to rate-to-age life insurance.
Locking in your premium rate can save you tens of thousands of dollars over the lifetime of the policy. It makes budgeting easier as you’ll know the cost of your insurance today and in the future. You’ll be able to maintain your insurance more easily in later years.
Which one is right for you?
There is no one-size-fits-all with life insurance. The right life insurance policy will depend on your short- and long-term financial goals, assets, debts, cash flow and attitude to risk.
Stepped premiums could be the better option for you if you are planning on keeping insurance for a short period.
If you need long-term protection and can afford the higher initial costs, level premiums can offer significant savings over the lifetime of the plan.
But there is a third option?
A smarter way to structure your insurance premiums could be to combine both premium structures.
Hybrid insurance
A hybrid or mix of level-term and stepped premium insurance creates long-term affordability and certainty. As you get older and the protection you require gets less, you can reduce your yearly stepped insurance or just keep your level-term insurance. You choose. You can be certain of your budget and have the peace of mind of knowing your loved ones are provided for.
Hybrid premiums start off costing more than your typical stepped premiums but are cheaper than level-term premiums. They increase like a stepped premium for a set period, and then you can lock into a rate at a certain age. Your premium converts to a level premium when cover is most often needed but you can afford to keep paying.
Optimum insurance
Some insurance companies refer to hybrid insurance as Optimum insurance. It provides savings over the term of the contract yet is more affordable at the outset.
Get expert advice before you make the leap
As with everything in life, each life insurance policy option has its pros and cons. In order to find out which life insurance policy would be the right fit for you and your family, talk to an experienced insurance adviser at Global Finance either by calling 09 2555500 or e mail at info@www.globalfinance.co.nz today. We’re here to help and guide you through your options
The information and articles published on this website are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in articles on this website should not be substituted for financial advice. Financial advice should always be sought. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or their employees liable.