“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|
|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 are 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.
So what is the difference between the costs?
When it comes to life insurance there are three very popular premium patterns.
• 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.
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.
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.
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