The secret that nobody tells you about life insurance.
I recently did an R 1m life insurance quotation for a woman aged 62.
When it comes to life insurance you have various options on how aggressive your premium and your cover amount must grow.
The sad reality is that due to the nature of the insurance industry, brokers and insurers always try and sell the cheapest premium without considering the long-term effect. Below I have compared two life insurance quotations over a 20-year period.
Option 1 – Life insurance of R 1m which grows annually by 4%. The premium, however, DOES NOT increase annually but stays LEVEL until the death of the life insured.
Option 2 – Life insurance of R 1m which grows annually by 4%. The premium, however, increases annually with 10% until the death of the life insured.
We can clearly see that option 2 starts off much cheaper than option 1, and more often than not that is the only quote that the clients see. The client is happy and signs the paperwork. The long-term effect never gets explained in detail.
What usually happens next? The client continues to pay the life insurance for a few years whereafter the premium gets too expensive, he decides to cancel the policy due to the affordability of the policy.
Who wins?
- The insurance companies. They received a few years of premiums without having to pay out a life insurance claim.
- The Broker.He received a lump sum upfront commission on the sale of the policy, and he is usually happy as long as the client pays the premium for 2 years or longer.
Who loses?
- Clearly there is only one loser in this scenario and that is the client.
Let’s look at the long-term financial implications.
Option 1 starts off more expensive than option 2, but the premium stays level (does not increase). After 7 years the premium of option 2 catches the premium of option 1, after that it becomes a very slippery slope. If you compare the actual expense over 20 years, the client almost PAYS DOUBLE over the period in option 2 than in option 1. The affordability of option 1 over a longer-term therefore becomes much more reasonable.
This time around the client should be able to afford the policy until death, his family gets a large life insurance payout from the insurance company. The win-win situation we are all looking for.
This is where good financial advice plays a massive role. Don’t just always go for the cheapest quote out there. It WILL come and bite you at a later stage.
Without being bias, The Option 1 premium pattern is currently only available from one insurance company in the market (Cover increases but premium stays level) (Contact me if you want to know who the company is). Most/All the other insurance companies focus on option 2, as it is a more profitable outcome for them.
Your current life cover is most likely Option 2 and in the words of one of the TV ads currently doing the rounds, my advice will be to “change dai ding”.
For financial advice feel free to contact me. (We also do financial planning consultations over Skype/Zoom, at any time suitable for you)
Heinrich Coomans | CA(SA) | CFP ® is a Director of SPI WEALTH. For enquiries contact, heinrich@spiw.co.za or 013 752 6566
