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.”
Below we will be giving you a breakdown of the key differences between age and level rated premiums;
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, saving for a first home deposit, paying down a mortgage, 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.
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.
Below you can find the accumulated difference between what an age rated premium would cost a 47-year-old make non-smoker on age rated vs level premiums for $1,00,000.00 of life cover.
As can be seen at the age of 79 that same $1,000,000.00 cover would cost almost $100,000.00 per year vs the level premium that is still the same at just under a $1,000.00 per year
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
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