Your premiums are likely to increase each year on the anniversary of your policy (the date you took out the policy), unless you agreed to what is known as a level premium.
It is important to understand how your premiums will increase and be sure you will always be able to afford to pay them. Changing policies later in life could result in more exclusions and or loadings.
Your premiums will typically increase at a higher rate than the amount for which you are covered (the sum insured) increases. This means you may find, for example, your cover will increase at 6% a year, but your premiums may increase by 10% a year.
The reason for this is that increases in premiums are a result of two different factors:
1. Increases in your cover
If you have agreed to increase your cover by a certain amount each year, your premiums will increase each year to cover the higher amount for which you are insured.
You can choose not to increase your cover – to keep it level - meaning each year the amount for which you are covered is effectively reduced by the rate of inflation.
Allowing your cover to reduce by inflation may be appropriate if you take out cover to pay off debt that reduces each year, or to provide for dependants, such as children, who get closer to becoming financially independent each year.
2. Changes in your risk to the insurer
Your life insurer bases your premiums on the risk or probability of you dying, becoming disabled or contracting a severe illness.
To assess this risk, life insurers’ underwriters consider a number of factors including your age, health, family health, smoker status, education, occupation, hobbies and other factors. Read more What does it cost to insure your life against death, disability or severe illness?
Each year as you get older, your risk of dying, being disabled or contracting a severe illness changes and on many policies, life insurers increase your premiums to compensate for this.
Just how much your insurer increases your premiums to compensate for this risk depends on the premium pattern used by the life insurer chosen by you. This will in turn determine how affordable your cover will be in the future.
Life insurers are obliged to disclose to you how your premiums will increase. Some show you the amounts in rands, but it is hard to make sense of these numbers without knowing how your income will increase.
It may be easier to focus on the percentage increases and how they relate to inflation. Your income is most likely to increase with inflation, and possibly more if you receive merit increases or promotions as an employee, or you grow your business income.
This is how your premiums can increase:
Level premiums
If you agree to keep your cover amount level, a life insurer may offer you cover at the same premium for a number of years after you take out your policy.
The life insurer takes into account the cost to cover you for an increasing risk of dying or becoming disabled as you age, and spreads it out over the term for which you are likely to be covered. You pay more initially than your true risk to the insurer and less later on.
This means the premiums may be more expensive when you are younger and relatively cheap when you are older compared with other policies that set premiums in line with the risk you pose to the insurer each year.
The premiums are kept level for what is known as a guarantee period – typically a number of years. It is then reviewed in light of how the insurer is currently pricing its premiums for different risks. Any increase will not be affected by your age or medical status.
Age-rated cover
On these policies, your premiums will increase with your age – the premiums are said to be age-rated. If you have chosen to increase your cover, your premiums will increase for both the increase in cover and the increase in your age.
Age-rated premiums make a life policy more affordable for you when you are young, but if the age-rated increases are aggressive, the policy may become unaffordable in the future.
At that stage you may be older and your health may have deteriorated, making it more difficult for you to replace a policy you may be forced to cancel due to its unaffordability.
Life companies therefore sometimes vary the age-rated premium, making them a little more expensive when you are younger and reducing the increases required when you are older.
Premiums with fixed compulsory increases
These policies are initially priced somewhere between a level-premium and an age-rated policy, but the premium will increase by a predetermined amount each year.
The initial premium can be higher than that of an age-rated policy, because some of the premium collected when you are younger is used to keep the premium increases to a set amount when you are older.
Premiums with stepped increases
Another way in which life insurers can reduce the initial premium is to offer a premium that is subject to a review and potentially an increase after a certain number of years. This is known as a stepped increase.
You will be offered a premium guarantee for a set number of years and thereafter:
The combos
If you choose to increase your cover and you choose anything other than a level premium policy, the two increases could result in:
1. Fixed cover increases for fixed premium increases
The amount for which your life is covered may increase by a set amount each year, but your premiums will typically increase by more than your cover increases.
For example, a 10-percent premium increase each year may secure a seven-percent increase in cover; a five-percent premium increase, a 3.5-percent increase in cover; or cover that grows in line with inflation (the consumer price index or CPI), with premiums rising at CPI plus three percentage points.
2. Fixed cover increases with premium increases to be determined
Some policies offer a fixed annual increase in cover, but the premium increase is determined by the cost of cover at the time the increase is applied, and the cost of the cover takes into account your age. So the increase in cover will become greater each year as you get older.
3. Fixed premium increases with cover increases to be determined
Some life insurers offer you the option to increase your premiums by a fixed amount, but because of the increasing risk based on your age, they may reduce the growth or increase in cover each year.
