Don’t believe me when I say that life insurance can kill you?
If I gave you the two options below, which one would you take?
- R1 million worth of life insurance at R200 a month, or
- R500, 000 worth of life insurance at R500 a month
Off the bat I’d take the R1 million? And that’s where some of us go wrong. I say “some of us” because for some, the first option is best. But for others, option one would kill them financially.
I have a client who went with option one. At the time he wanted as much cover as possible at the cheapest possible price. Now in order to get this right, I had to quote based on so-called ‘age rated‘ cost as well as 5% compulsory annual increase in cost. This is explained in another article but for now just accept that the cost of the insurance keeps going up while the cover of R1 million stays the same every year.
Anyways, his health starting deteriorating, and he found that he no longer qualified for life insurance at standard rates. His cost was ‘loaded’ and so he was forced to keep his existing policy which was now getting expensive.
Long story short, he’s heading into retirement, he no longer qualifies for life cover, and he’s sitting on a fixed income with insurance which gets more expensive every year.
He should have chosen option 2 and taken a level premium insurance policy when he had the chance.
So what’s a level premium then?
Level premium means you pay the same amount in year ten as you pay in year one until of course, the guarantee term expires! Their beauty lies in the fact that what you pay remains the same throughout.
Ok boet, you’re losing it..a Ferrari is beautiful – an Arabian stallion is beautiful..but level premiums? Come on..
Well, maybe I was exaggerating but how else am I going to get you excited about insurance?
Let’s compare it to a loaf of bread…
Paul starts his career as a trainee accountant on a basic wage of R10, 000 per month. Because of his meagre wages he finds himself ‘living on bread and bread alone’! Every day he stops off at the local supermarket and purchases a loaf of bread for R10.
A year later he discovers that the price of bread has increased with 10%. Now he’s paying R11 a loaf! Ten years down the road and now Paul is paying R26 for that very same loaf of bread.
Fortunately for Paul, his salary has also increased with 10% each year…He now earns close to R26, 000 per month!
The price of bread has literally kept pace with his increases in salary.
Now imagine the situation if the price for a loaf of bread never increased?
R10 for a loaf while earning R10, 000 a month versus R10 a loaf while earning R26, 000 a month!
Isn’t that a thing of beauty?
Don’t you wish Eskom could work this way (In fact they give you less each year and charge you more!)?
So imagine your life insurance getting cheaper and cheaper the longer you hang on to it
But what if I want my life cover to increase each year?
Not a problem. Increasing your life insurance with 10% each and every year?
The insurer simply calculates the level premium for the additional amount of cover and adds this to your existing level premium. As soon as you feel it’s getting expensive, then you cancel the cover increase and the cost then stays the same.
Who should consider taking out level premium life insurance?
- Anyone who wants life insurance with the viewpoint of keeping it for the long haul!
- Anyone who is close to retirement and living on a fixed income
- Anyone whose health is of concern and who might not qualify for life insurance at better rates (By the way, if you’re having problems qualifying for life insurance because of some health issue, why not contact me?)
Now here’s the really sad thing…
The guy who buys cheap insurance sooner or later starts shopping around for even cheaper insurance.
Let’s say he’s spent R10 grand on the life insurance over 5 years.
At the end of the 5 years he gets nothing back when he cancels, and all it cost the insurer was a letter every year informing him of his next price increase.
Think carefully before you buy the cheapest option!
Maybe you bought level premium life insurance 20 years ago. Why not tell us how much are you paying and for how much life insurance? Let’s see who’s paying the least for the most life cover.
The InsuranceFundi team
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