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When it comes to life insurance, a policyholder will either be charged a level rated premium or one that increases each year at a fixed percentage (i.e. an escalated premium) or in line with the age rated increases matching the increase in risk. It is important for policyholders to understand the difference between these premium patterns so that they can ensure they are paying the most appropriate rate for their life insurance, both now and in future.
This is according to Tamar Lewis, Head: Product Development at PPS, who explains that life cover is an important insurance product that people need to have in place to financially provide for their dependents should they pass away. “As a life insurance policyholder, it is important to understand both the benefits of the policy as well as the ongoing premiums, so that there are no surprises in the future.”
Lewis provides a breakdown of the key differences between age and level rated premiums;
Age rated or escalating premium
An age rated premium is cheaper at inception of the policy with the premium increasing each year as the policyholder ages. The benefit of this is that the initial premium is lower and therefore the client can purchase the required level of cover if affordability is an issue for them at the time of the purchase. The lower premium affords the client more cash flow, which can be used to settle other needs like retirement savings, bonds, school fees, etc.
An age rated premium will increase every year by a percentage which varies between the different life insurance providers, with the average being anything between 2% -15%. With most age rated premiums, the increase will rise annually as the underlying risk of the policyholder grows every year as they get older.
With an escalating premium, insurers increase the premium with a pre-determined fixed percentage every year. At PPS, while the policyholder is still young their annual increases will usually be low as they are still in the process of establishing their career and their income is growing slowly. As they begin to earn more in their later years the annual increases are likely to be larger. During retirement the premium increases are limited to be in line with inflation, to assist the policyholder to manage their cash flow on a fixed income.
Level rated premium
Assuming that all else stays equal and the benefit amount does not increase, the level rated premium does not increase with the policyholder’s age. This type of premium is initially more expensive than an age rated premium but it will remain level for the entire policy term. The benefits of this premium is that it provides stability for the policyholder as the monthly premium will remain the same over a long period of time
This premium is commonly chosen by the less price sensitive policyholder who is concerned about the affordability of the insurance premium as they get older and particularly in retirement. This type of premium gives the person more control over their budgeting and cash flow, as their policy premiums are constant.
“People who do not know what type of insurance premium they have need to ensure that they speak to a reputable insurance broker in order to get a full understanding of the cover and take future implications into consideration when choosing a premium pattern for their life insurance,” says Lewis.