Different Types of Insurance Premiums - Whats is best for me?
April 14, 2011
There are two types of premiums when buying life insurance, trauma insurance or Income Protection Insurance.
It is very important that you understand the difference and get the right type of premium structure for your current position.
Stepped Premiums and Level Premiums
Stepped Premiums are an excellent way of obtaining a high level of cover for a low amount of premium. Stepped Premium contracts will start off low but will increase every year as you age. As you move into a higher Age band so too will your premiums. Insurance companies will set their premiums based on a number of factors such as your age, statistics, whether you are male or female, your height to weight ratio (BMI), General Premium increases and any CPI movements in your sum insured. As you get in to your 40's however the premiums really do start to take off. Generally if your young, have children and have high amount of debt we will recommend stepped premiums. The reason for this is we can purchase a large amount of life insurance, with Trauma and an Income Protection policy realatively cheap. This will give you a very good level of protection for your family at the lowest possible premiums.
There are other reasons you may only need stepped premiums. You may only need cover for a short period of time or there will not be a long term requirement for insurance eg your mortgage is just about paid off and kids have left home so there is simply no need for long term insurance. Most business policies will also only be on a stepped premium contract as it makes better use of cashflow and a business needs are constantly changing so stepped premiums are the better way to go.
Level Premiums (or Fixed Premiums)
Level Premiums are quite a bit more expensive to start off with than stepped Premiums but over time are extremely attractive. Think of it as a bit like locking in your mortgage but instead you are fixing your insurance premiums for a period of time. Generally we look at how long you need your cover for and will set the term for either 10 Years, To Age 65 or To Age 80. Level Premiums are an excelllent way of providing long term affordable premiums. Yes you pay more now than you have too but this will literally save you thousands of dollars over the long term. We generally find that when people are getting into their mid 40's Insurance Premiums really start to take off. The problem with this is that when you need your insurance cover the most (that is when you are moving into the high risk age band) you can no longer afford the premiums. Our experience is that clients will then look to reduce the amount of cover they have or will let their covers lapse ...... just at the very time they need it the most. The solution to this is LEVEL premiums. There is an opportunity cost (or time value of money) to having level premiums but our experience shows that once you have made the commitment to Level premiums you will never look back as over time the premiums will never be cheaper.
Trauma Insurance and Fixing your Premiums.
I believe that what you really want to achieve is level premiums for trauma insurance or serious illness insurance. This is the insurance that will pay you a lump sum if you get diagnosed with a serious health issue. Try getting a Stepped Premium Quote for Trauma Insuarnce for a 55 year old for $100,000! The premiums are very very expensive and only go up from there. My opinion is that you want to level your trauma insurance premiums as early as you can and for as much as you can afford. You need to make sure that the sum insured will be sufficient for the life of the contact. The reason I say level your trauma or critical illness insurance is that not too many people get to Age 65 without a serious health issue. Trauma Insurance is very expensive when you get older and this is what throws out the pricing on stepped premiums. I would therefore level my trauma insurance as soon as possible before the age of 50. Long term this will always give you the comfort of knowing that you will have insurance cover. There is nothing more tragic than when someone in their 50's lets go of their insurance only to have a serious health problem that would have otherwise been covered if they had kept their insurance. The other thing to think about is not all insurance companies offer True Level Trauma products. You want to make sure that any contract you purchase is going to last the distance and will be future proofed if the insurance company upgrades their policy wording. What you want to look out for is guaranteed pass back (ie they will upgrade you to the new wording, only if it is in your favour though) and that the premiums are true level premiums. This should be in written into the terms and conditions of the policy wording. Any Insurance Broker will be able to help you select the right policy wording for you.
What type of premium cover really depends on your situation and your budget. Stepped Premiums are an excellent way of getting a high level of cover relatively cheap. On the other hand having fixed premiums for a period of 10 or 20 years is an excellent way of providing long term sustainable premiums. Our advice is to always get a premium projection with Stepped Premiums so you can see the anticipated increases over time. Compare this to the level premium option. Quite often we will recommend a half & half option. Therefore giving you the best of both worlds. An example may be $350,000 level for 20 years and then $500,000 stepped premium contract whilst there is a mortgage and children at home. When there is no longer a need for the stepped premium contract you can drop it and leave the level product in place. This will give you a robust programme for now and in the future. Getting the right advice is so very important and any good financial adviser will be able to help you navigate the different insurance companies products as well as advising you on the correct amount of insurance and different premium types.