How would you feel if I sold you life insurance knowing you wouldn’t be able to afford it 10 years from now?
My guess is you’d want to punch me in the face. But you won’t believe how many people still choose this option even after I explain it to them.
So who would buy life insurance which isn’t in their best interests?
Let’s be honest; none of us like buying life insurance. After all, it’s based on the fear of dying.
So when I pop around at your place and prepare a quote for a million bucks worth of life cover; you can think of a million things you’d rather spend your money on. What you really want is the cheapest life insurance possible.
Given a choice between spending:
- R500 a month for a million Rand’s worth of life cover, or
- R200 a month for the same cover
you go for the cheapest option, right?
But before I start slamming age rated life insurance, let’s ask ourselves a question:
How then does an age rated life insurance premium work?
Age rated premiums are based on two things:
- A compulsory percentage increase in the cost of the insurance every year. This is usually 5% every year but your mileage will differ depending on your age. It could also include an increase in the cover which would take the annual increase to way more than 5%.
- A steep jump in the percentage increase every couple of years. This could happen every 10 years when the annual percentage increase might jump from 5% to 7, 5% in one year. Usually when you move from one age band into the next.
So in the good old days you had a standard 5% compulsory increase in the cost of life insurance every year. You could expect that exact increase year after year as long as you paid your premiums. No surprises down the line.
With age rated increases the same thing happens except that they also include an age band. As you move from one age band to the next, your premiums reflect this by jumping to the specified percentage applicable to the next age band.
The younger you are – the lower the annual percentage increase.
The older you are – the higher the annual percentage increase.
Hollard Life. (Formerly known as Altrisk) is the most transparent about their age rated increases.
They state that their age rated premiums work according to these age bands:
- Up to age 34 at your next birthday
- From age 35 at next birthday to 44 next birthday
- From age 45 at next birthday to 54 next birthday
- From age 55 at next birthday until death do us part
And what is the percentage increase you could expect?
Let’s look at Hollard Life. again…
- Up to age 34 next birthday 2, 50% per annum
- From age 35 to 44 next birthday 5, 00% per annum
- From age 45 to 54 next birthday 7, 50% per annum
- From age 55 next birthday onwards 8, 25% per annum
Consider the example of Andrew who takes out life insurance just before he turns 30:
From age 30 to 34 his premium will increase with 2, 5% for each of those four years…
- Age 30 at next birthday R150 per month
- Age 31 at next birthday R153 per month (2, 5%)
- Age 32 at next birthday R156 per month (2, 5%)
- Age 33 at next birthday R159 per month (2, 5%)
- Age 34 at next birthday R162 per month (2, 5%)
Once he turns 34 (or age 35 at his next birthday), the premium he was paying the previous year will now increase every year with 5% instead of 2, 5% for each of the succeeding ten years:
- Age 35 at next birthday R170 per month (5%)…
So who would be most disappointed with buying age rated life insurance?
If you’re about to move between two different age bands you’re in for a nasty surprise.
Let’s say you’re about to turn 45.
Next years increase won’t be the 5% you’ve come to expect over the previous 10 years. From now on it’s 7, 5%, and wait until you turn 55…
Would age-rated premiums work for you?
If you’re only wanting life insurance for a short period of time then this would suit you to a tee.
Think of home loan cover – or credit life cover – then yes, go for it!
But if you’re taking out life insurance to provide for estate duty in thirty years time…then don’t touch it with your neighbour’s barge pole!
Problem is what happens when:
- the life insurance becomes unaffordable, or
- you’ve just been diagnosed with some or other severe illness and can’t find anyone willing to insure you?
Now you’re in a situation where you can’t afford the life insurance at a time when you need it most.
Who should never buy age rated life insurance?
Two kinds of people:
- If you’re close to retirement and can’t afford large increases in the cost any more – then stay away, or
- If you plan on keeping the cover for the whole of life. Maybe you’re aware of a hereditary disease which runs ins the family. Maybe something like diabetes.
Here’s the takeaway…
Don’t throw the baby out with the bathwater when it comes to age-rated premiums. Just understand why you’re buying the life insurance.
It doesn’t help to get a 5% increase every year and having the cost of your life insurance increase at 8%
Always consider the starting premium…
- 8% of R150 per month is R12
- 5% of R500 per month is R25
In that example, age rated cost makes sense, doesn’t it?
Here is the basic rule:
- You either pay less upfront and select a higher annual increase going forward…or
- pay more in the beginning and select a lower percentage increase going forward.
Would I buy insurance using this finance option?
Yes, if I was looking for bond protection and wanted as much cover possible for as cheap as possible.
But I’m more comfortable recommending level cost life insurance. I’ve seen too many clients cancel their life insurance 5 years down the row because of the price. In all sincerity, I cannot recommend age-rated premiums to anyone nearing retirement.
How do you feel about life insurance where the cost increases every year but the life cover stays the same?
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