SA's No 1 Insurance Blog

“Please cancel my life insurance!”
“Certainly, may I ask why?”
“Well, to start with, in 5 years the cost has doubled but the cover stayed the same. I managed to get cover cheaper elsewhere”

Imagine being the poor client…

Buying life insurance was the last thing he wanted to do, but if he wanted that home loan, then that was what he had to do.
The bank insisted he insure his life for a million Rand, and that’s what he did – the cheapest way possible.
Imagine being this poor broker…

He knew the day they signed this application, that five years later they’d be having this conversation.
He knew he’d go from being the hero who got the customer exactly what he was looking for, at the lowest possible price, to being the miserable sod ripping off unsuspecting clients.

So who is at fault – a greedy broker or customer with selective memory?

Let’s leave it to you to decide.

First off, there’s the need
This is the amount of life insurance the client wants. In this case it’s R1 million to cover a mortgage bond.

The broker arranged three quotations all from the same company:

• R1 million life insurance at R345 a month,
• R1 million life insurance at R442 a month, or
• R1 million life insurance at R614 a month

Watch our video below

So what’s the solution?

Well that’s dead simple, right – why pay a cent more than you need to?
Actually, the cheapest option might be the worst possible choice. Here’s why…

The first question to ask is why does the same company offer three different prices?
And that has everything to do with whether the cost increases or not. In our example, the cheapest cost also increases the most from year to year while the most expensive cost doesn’t increase at all.

Let’s compare the three over the term of the twenty year mortgage bond:

Premium Comparison Table Over 20 Years
 Level Premium  5% Compulsory Premium  Age Rated Premium
Year  Monthly  Cumulative  Monthly  Cumulative  Monthly  Cumulative
 Premium  Premium  Premium  Premium  Premium  Premium
1       614,00             7 368      442,00             5 304      345,00             4 140
2       614,00           14 736      464,10           10 873      370,88             8 591
3       614,00           22 104      487,31           16 721      398,69           13 375
4       614,00           29 472      511,67           22 861      428,59           18 518
5       614,00           36 840      537,25           29 308      460,74           24 047
6       614,00           44 208      564,12           36 077      495,29           29 990
7       614,00           51 576      592,32           43 185      532,44           36 380
8       614,00           58 944      621,94           50 648      572,37           43 248
9       614,00           66 312      653,04           58 485      615,30           50 632
10       614,00           73 680      685,69           66 713      661,45           58 569
11       614,00           81 048      719,97           75 353      711,06           67 102
12       614,00           88 416      755,97           84 424      764,39           76 274
13       614,00           95 784      793,77           93 950      821,71           86 135
14       614,00         103 152      833,46         103 951      883,34           96 735
15       614,00         110 520      875,13         114 453      949,59         108 130
16       614,00         117 888      918,89         125 479    1 020,81         120 380
17       614,00         125 256      964,83         137 057    1 097,37         133 548
18       614,00         132 624    1 013,07         149 214    1 179,68         147 704
19       614,00         139 992    1 063,73         161 979    1 268,15         162 922
20       614,00         147 360    1 116,91         175 382    1 363,26         179 281

Who would have thought that the most expensive option would turn out the cheapest over the twenty years?
Look at year eight where the R442 a month cost finally matches and then overtakes the R614 cost. Or what about year nine when the R345 a month cost matches and overtakes the R614 cost?

And finally there’s the total amounts paid in over the twenty years.
Notice that the R614 a month cost equates to R147, 360 over the twenty years compared to R179, 281 on the R345 a month option.

You can download the Life Insurance Premium Pattern Calculator here.

So what is the difference between the costs?

When it comes to life insurance there are three very popular premium patterns.

These are:

Age Rated where your annual percentage increase is based on your age. The older you get, the higher the percentage increase. You might start out with a 2.5% annual increase at age 30 and end up with a 10% annual increase at age 60.
5% Compulsory Premium Increase where your cost increases with a fixed 5% every year, and
Level Cost which stays the same every year.

Less popular are:

Renewable Contribution Pattern where the initial cost is guaranteed for the first fifteen years whereafter they are reviewed to see if they are still sustainable for the next five years, and
Stepped Premiums which “step up” or “double up” every ten or fifteen years depending on which option you select

To make things slightly more complicated, your broker could add:

A voluntary percentage increase over and above the compulsory 5% annual increase:

• This voluntary percentage increase would be used to purchase additional life insurance every year.
• A 5% voluntary increase added onto the 5% compulsory increase would increase your cost by 10% every year.
• Your cover will increase BUT you can rest easy knowing the cost never exceeds 10% in any one year.

A percentage increase in the life insurance amount every year
• For instance, you could select a 5% increase in the cover every year
• Selecting a 5% compulsory increase along with a 5% increase in the actual cover could mean an increase anywhere between 10% and 15% every year
• This is ideal for someone wanting their cover to increase at a fixed rate every year regardless of cost

So when should you choose increasing cost options?

  • When you need a large amount of life insurance immediately, but don’t have the budget to spend a ton of money on insurance right now.

When your intention is only to keep the cover in place for ten years or less.

When shouldn’t you choose increasing cost options?

  • If your intention is to keep the cover over the long term and through into retirement then this option can get expensive. At retirement your income is reducing, and the last thing you want is for the cost of your life insurance to increase.
  • If your family has a history of poor health you don’t want to be in a place where you can’t afford the life insurance, yet can’t replace because you no longer qualify for life insurance.

Conclusion:

Think long term when buying life insurance. Yes, by all means shop around every couple of years to see if you can get life insurance cheaper elsewhere, but always keep it in the back of your mind that you might not qualify next time around.

From personal experience we’ve found that those who:

• Choose a level cost
• Hang onto their policy for five or more years
• Can’t be matched pricewise.

Consider this…

You buy life insurance on a fixed cost of R1, 000 a month. It sounds expensive this year, but next year you get an 8% salary raise and now the R1, 000 feels more like R900 a month. The year after you get another 8% raise, and the R1, 000 feels more like R700 a month.

Until next time.

The InsuranceFundi Team