ARE YOU PAYING TOO MUCH?
You could save as much as 30% of the premiums you pay on risk life assurance – against early death, for example – by, in effect, changing your policy from one paying out a single large lump sum and priced for the maximum term, such as “whole of life”, to one covering each of your financial needs with a precisely matched duration of cover.
BrightRock, a comparatively new kid on the risk life assurance block, has made this claim.
It says that, as a result of the traditional “lump-sum” structure, your cover becomes increasingly unaffordable, resulting in your reducing or cancelling it in later years. Having paid from day one for the cover, you then sacrifice it at the very time you need it most.
And when you reach the stage where your cover becomes unaffordable, you may not be able to obtain more affordable cover, because you may have developed a health condition that makes you either uninsurable or that necessitates exclusions and/or premium loadings on your policy.
The BrightRock claim follows the publication last year of research undertaken by True South Actuaries & Consultants, on behalf of BrightRock, which showed that many people who bought seemingly “cheap” life assurance when they were younger faced losing their cover as their premiums escalated above the inflation rate and became increasing unaffordable.
WHAT TO AVOID
Schalk Malan, executive director at BrightRock, says there is a triple whammy for policyholders in the way most risk assurance premiums are calculated. The three big drawbacks are:
1. Low initial premiums: To attract new business in an increasingly competitive market, life assurance companies offer seemingly cheap premiums when you are young and unlikely to claim. But as you grow older and become more likely to claim, your premiums escalate rapidly.
He says a five-percent-a-year increase in the amount of life cover you need to keep abreast of inflation can result in an average premium increase of 11 percent a year. This means that, over 15 years, a doubling of cover will push up premiums by 480 percent.
Eventually, the premiums are likely to become unaffordable, with the result that you will either reduce or cancel your cover. This means a lower potential benefit payout for the life assurance company.
2. Longer assured periods than necessary: Life assurance is mainly sold as “whole of life”, and disability assurance usually lasts up to retirement age. Whole-of-life usually means you are covered until an improbable age of over 100. The premiums you pay from the very first month are based on this longevity.
Much of the life cover you buy becomes superfluous. For example, the cover you have for debt on your home loan or for the education of your children is required only for specific periods, not your entire life. You would be better off from your first premium payment if you had bought cover for a fixed period for those needs that exist only for shorter periods.
Malan says that buying a whole-of-life policy is similar to buying a bag of lettuce today that’s big enough to cater for all of your future salad requirements.
3. Decreasing value: Whole-of-life assurance is for an aggregate amount that is typically priced to increase, but many of your assurance needs decline in value.
For example, if you have a newborn child, the future cost of education will be significant. If you do not have assets to cover that cost, you need assurance that will pay out if you are unable to earn a living. But as the years progress, your child will grow older and your assets will increase in value, and so the amount of assurance you will need for your child’s education will decrease. This means, again, that, from the first premium of your whole-of-life policy, you are paying for cover that you do not need.