You often hear the saying, “A life policy is a life policy – it pays out at death.” If you're one of the people who think that way, I have a surprise for you today. Life insurance policies are not a one-size-fits-all product, and it’s important that individuals and businesses ensure their policies meet their unique needs.
Two aspects I would like to highlight are premium patterns and guarantee periods.
The first – premium patterns – can vary significantly from policy to policy and can notably affect the monthly premium amount. One example is age-rated premiums. These are usually cheaper at first but become more expensive over the long term. Similarly, premiums that increase by a fixed percentage each year are also initially cheaper. Then there are policies where the premium is fixed for a set term – usually 15 years – after which the cost increases dramatically at renewal.
Another option is level premiums, where the premium stays the same for the life of the policy. These are generally more expensive at the start but more cost-effective over the long run. With this option, you can also choose to increase your premium by a certain percentage annually.
Unfortunately, financial intermediaries often mislead clients when it comes to monthly premiums, and policies are frequently replaced because they appear to be “cheaper.”
However, because premium patterns differ, this is often not actually the case.
Guarantee periods, on the other hand, refer to the length of time for which the quoted premium and cover are guaranteed. Once that period ends, the insurer evaluates the profitability of the risk pool, and if it is running at a loss, premiums can increase sharply. If the increased premiums become unaffordable, the cover may even be reduced.
The role of life insurance should not be underestimated, as it is often the only way a person can ensure their family is financially independent in the event of an untimely death.
Make sure you have sufficient life cover for estate costs such as executor’s fees, estate duty, capital gains tax, and so on, as well as for the settlement of debt and to provide for your dependants’ needs.
Also remember: cheap purchases end up costing more. So be warned – don’t just go for the cheapest option. Replacing life policies can be risky. Work with your financial planner to create a plan tailored to your needs.