What to consider when it comes to Insurance Premiums!
Obtaining appropriate life insurance shouldn’t be about price but purpose or reason for the cover. However, even if you have taken the time and effort to implement an Insurance Strategy, no one likes to pay the premiums, especially when they start to sky rocket at a point in your life when it is potentially needed the most! Below are some points of consideration that can be used to alleviate premium blowout.
Take out cover when you’re young
When you’re young, you have less chance to build up ‘Risk Baggage’ (health issues or poor lifestyle choices) which may impact your policy by adding a loading (premium increase) or exclusion (narrowing the scope of coverage).
The sweet spot (the cheapest time to commence cover) is 27-28 years of age. Prior to this age, you are more likely to undertake risky behavior (& therefore priced into to the costs). Post this age, you are on your way to building up your ‘Risk Baggage’.
Structure premiums appropriately
Generally there are two types of premium structure, stepped and level. Stepped starts out relatively inexpensive but increases as you age and become more risky – in your late 40s and 50s the rate of change can be quite steep (10%+ increase p.a.). Level premiums, although not guaranteed, should remain consistent through the life of the policy (if no indexing is applied). They are more expensive initially (compared with stepped premiums) but become comparatively cheaper over time.
Each structure can be utilised for a specific purpose;
- Stepped is more suited to shorter/medium term needs – such as a policy to cover your debt obligations (which should hopefully be reducing over time)
- Level is more appropriate for longer term requirements – such as protecting your ability to earn income (i.e. an income protection policy)
The ‘Breakeven Point’, where the cumulative stepped & level premiums cross, is your point of reference for determining the appropriate premium structure. If the timeframe of the cover is less than this, you should opt for stepped cover and vice versa if the timeframe is longer (use level premiums)
Active & healthy lifestyles
Life insurers in the past have focused on punishing negative behavior which increases the life insured’s risk profile (i.e. smoking) by either applying a loading or exclusion or, potentially refusing cover altogether.
This still occurs, however in recent times life offices have recognised the benefits of encouraging active & health lifestyles through offering health & wellbeing programs. A member of one of these programs partakes in activities which improves / promotes health (such as clocking up a certain amount of steps per day) and in return is rewarded with premium reductions and other benefits such as discounted gym memberships, wellness vouchers etc. This has created a more sustainable business model with evidence of these programs showing reduced policy lapse rates and less claimable events occurring.
Don’t over insure
Insurance cover shouldn’t be seen as like hitting the jackpot. Make sure you have the right amount of cover in place for your personal financial position. If your spouse passes away and you intend on selling the investment property you hold & extinguish the outstanding debt there is no need for a policy to offset the current loan.
If you would like to have your current insurance cover reviewed or discuss your potential insurance needs, please contact our Insurance Specialist, James Grindrod or one of our Financial Specialists today. Alternatively, you can complete your details below and we’ll be in touch or give us a call on (03) 9835 8200.
DISCLAIMER: GENERAL ADVICE ONLY
The information provided in this blog is general in nature. It has been prepared without taking into account any person’s individual objectives, financial situation or needs.
Before acting on any information in this blog, you should consider its appropriateness to you, having regard to your objectives, financial situation and needs or seek professional advice from a financial advisor.
Accru are not recommending any investment or product, the investments mentioned are examples only. Please seek professional advice or do you own research for an appropriate investment.