Life insurance is one of those things you check off on your way to becoming a responsible adult, especially as you get married and start a family. In the event of your untimely death, there’s peace of mind knowing your family can pay the mortgage without taking on more debt – or worse, packing up and selling.
One of the most common reasons people avoid taking out life insurance is the perceived cost. But we’ve got good news – life insurance can be affordable and provide the right amount of cover for your financial circumstances.
Here’s the difference between rate-to-age and level term life insurance:
Also known as stepped cover, a rate-to-age life insurance policy is currently the most popular pricing structure for life insurance in New Zealand.
How it works
Your rate-to-age policy is recalculated every year. Each year, you get closer to your life expectancy and the risk of claiming your insurance policy increases. To cover the risk proportionately, premiums rise 2%-15% each year, depending on the life insurance company.
How is it calculated?
Rate-to-age insurance is recalculated every year when your policy is due for renewal. The calculation usually looks like this:
Yearly insurance cost = (entry age (and renewal age) x risk factors) x chosen insurance amount
The benefits of rate-to-age insurance
1. The upfront cost is more affordable : Compared to permanent life insurance, you’ll be starting at a price that better reflects your age. If you’re young and healthy, your premiums won’t be too high.
2. It’s cheaper in the short term: As your wage increases over time, so will your premiums. For some people, this may be the perfect solution for adding the cost of life insurance to their annual bills.
The drawbacks of rate-to-age insurance
1. It’s harder to maintain
Rate-to-age premiums can be very expensive to maintain depending on your financial situation. You risk not being able to afford life insurance when you need it the most.
2. It’s more expensive in the long run
Although this option is more affordable right now, it will likely be more expensive over the course of your life.
Level term (or term life) insurance
This type of life insurance covers you for a set period. Your premiums don’t increase with age – they’ll only increase if you decide to increase your cover.
How it works:
Depending on your budget, you choose how long you want your life insurance cover to last. A level term policy expires once your coverage period is over and usually doesn’t build in cash value over time. But, it’s more affordable than permanent life insurance and will still give you the peace of mind you’re looking for.
The most common cover period options are:
• Yearly renewable
• 5-year renewable
• 10-year term
• 65-year term
• 80-year term
• 100-year term
• Term to a specified age (usually until age 80 to 100)
How is it calculated?
Your insurance provider looks at your health, the cover period, the sum you want and your age.
The benefits of level term insurance
1.It’s specifically designed to your family’s needs.
Level term life provides a simple, affordable safety net, with plenty of options for the amount of coverage and the number of years you want it, providing you with the flexibility to build a policy that works for you.
2. Premiums don’t increase as you age.
Because level term life is based on an agreed value and cover period, you have more control over the price of your premiums in the long term, giving you more clarity when it comes to budgeting.
3. It may accumulate cash value for your family, specifically for level age 100 policies.
For example, you might pay a total of $50,000 over the term of your policy for life cover worth $500,000.
The drawbacks of level term insurance
1. It starts with a higher premium.
While the premium stays level or set for the length of the term compared to rate-to-age policies, you’ll likely be paying more in the beginning for level term insurance, particularly if you’re younger.
2. It’s not suitable for covering short-term needs.
You get more bang for your buck taking out level term insurance for a longer period. Think of it as a home loan – if you refinance every year, you run the risk of interest rates (or in this case, premiums) increasing because of your age.
Life insurance that’s affordable and provides the right cover
Rate-to-age premiums are calculated every year and increase as you get older. They start cheaper than level term insurance, but will be more expensive long term. Each policy option has its pros and cons, so the best policy for you depends entirely on you, your family and your financial situation.
Find out which life insurance policy would be right for you. Talk to an expert at Global Finance today.
**Underwriting criteria and insurer terms T’s and C’s apply