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Explain to me why my life insurance gets more expensive every year but my cover stays the same?

How do I reply to that…especially when I sold them the life insurance in the first place?

Usually, I have to remind them of the conversation we had 3 years ago when I warned them about this. The problem isn’t the fact that the life cover stays the same – that’s easy to fix – it’s the fact that the insurance has now become expensive for less and less benefit.

Here is how the conversation usually goes:

“Can you recall us discussing the three financing options when you took out the cover? No? Here’s a copy of the mail I sent you along with the spreadsheet where I compared the premium patterns over 10 years. But listen, it’s not a problem. I can always add 5% or 10% cover increase if you want?”

To be honest, who can blame them? No one loves paying for life insurance so the cheapest option always sounds good. After all, why pay R250 a month for a million Rand’s worth of life cover when the other option is R150 a month?

So in order to help you, I’d like to briefly explain the four premium patterns available when purchasing life insurance. In previous posts, I’ve ripped each of these premium patterns apart and explained exactly how each of them works, but there’s nothing better than repetition, right?

The four premium patterns from most popular to least popular are:

  1. Age Rated
  2. Compulsory annual increases
  3. Level, and
  4. Stepped

Which option is best?

Well, how am I supposed to know? I only sell the stuff! I’m kidding.  It would depend on how you answer the following three questions:

  1. Are you just starting out in life?
  2. Are you well established in life?
  3. Do you need to make sure that liability is paid off in the event of your untimely death?

Let’s look at question one…

Just starting out in life?

Imagine the situation…
You’ve just gotten married – the first child is on the way – you’ve just bought a home – and you still owe four years on the car!

You’re cracking open a Coke on the porch with a friend and insurance comes up (I know I know, highly unlikely, but run with me on this, okay?)

So I saw this financial advisor who said I needed R5 million in life insurance. Anyways, he said it would cost R750 a month. Can you believe it? I’m not Rockefeller, I’m the other fella! Most probably thinking of the nice commission he’d make of me. So you know me – I’m waking up to these things. I went and got a quote from another guy and you won’t believe it – the same R5 million came in at R400 bucks a month.”

If this sounds like you then consider age rated or compulsory increase premiums.

Let’s move on to question number two…

Well established in life?

“Finally! The kids are finished at varsity and out of the house. One more payment and then the house is paid off. I’ve got some extra cash so I’d better make sure I’ve got enough life cover. I’m not getting any younger and one of these days I won’t be able to get life cover.”

If this is you-you lucky so and so (I wish my house was paid off) – then level premiums is your best option.

And lastly, question number three:

Do you need to make sure liability is paid off if you die anytime soon?

“Flip…I hate banks. If they’re not charging me to deposit my own money with them, then they’re charging me to take it out! Now they say they’re not going to approve my bond unless I take out life insurance. Can you believe it?”

Sound like you…? Stepped premium might just be your answer!

In conclusion

Here’s my theory on life insurance:
When you’re young you’re blessed with good looks and no cash. Buying a home or a car involves going hat in hand to a bank. Even though there’s the little problem of never having enough money, your libido more than makes up for it! Before long there’s a happy little family on the way.

With way more years ahead of them than money at this stage, most young people need massive amounts of life insurance. The older you get – the less debt you ought to have –the less life insurance you need.

Ideally, by the time you retire, you should have little or no debt as well as enough money with which to comfortably retire.
No debts combined with enough cash means no need for life insurance UNLESS you have an estate duty problem.

So how do you see it?

  1. Would you rather get as much cover as possible for as cheap as possible?

  2. Or would you rather pay a little more now and know that it won’t cost more in future?

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