Life policies: you may pay more later
Before you buy a life assurance risk policy simply because it offers the lowest premium, be sure you understand just how the policy is priced and what premium increases you may face later on.
A life risk policy pays out on death, disability or dread disease.
Steep premium increases during the term of the policy, when a guarantee period ends or if you renew the contract can make a policy that looks competitive now unaffordable some 10 or more years later.
At that stage, new risk cover may be very expensive or your health may have deteriorated, making you uninsurable or subject to a premium loading or an exclusion from certain benefits.
Life companies have different premium patterns in a bid to ensure there is a policy to suit every pocket. Although this may help those who could otherwise not afford life cover, it also has nasty surprises for those who are unaware of how the premium patterns play out.
Recently, for example, a man who took out a life policy with Sage Life in 2001 for more than R8 million was faced with a premium increase of 52 percent when the 10-year premium guarantee expired.
Mr A, who was 58 when he took out the policy, is now 68.
The R8-million cover had escalated to R12.8 million, and the premiums to R25 446 a month, before the premium guarantee expired.
Under the guarantee, the premiums escalated at 10 percent a year, and the cover at five percent.
Momentum, which had taken over the policy from Sage, reviewed Mr A’s premiums at the end of the guarantee period and said he would have to pay R38 709 a month for cover of R13.4 million (five percent more than in the previous year).
Alternatively, Momentum offered Mr A the option to reduce his cover to R9.8 million and pay an increase of 10 percent, or R27 629 a month.
Mr A was so annoyed that he cancelled the policy, despite losing on the investment portion of the policy as a result of a surrender penalty.
Mr A was able to renegotiate an existing Altrisk policy on better terms to replace some of the cover he had on the Sage policy.
Philip du Preez, Momentum Retail’s head of insurance products, says Mr A’s policy was not priced for life; the premiums were set for the 10-year guarantee period and were to be reviewed based on his age at the end of that period.
Only 38 percentage points of the premium increase Mr A faced were a result of the review at the end of the 10-year period. The other 14 percentage points of the increase were a result of the compulsory annual increase and to accommodate the increase in cover, Du Preez says.
The best way to determine if an increase is fair is to compare the difference between the premium the person would pay at the date of inception of the contract and the premium he or she would pay at the end of the guarantee, he says.
If Mr A took out a new policy now at the age of 68, his premium would be more than double, so the 38-percent increase offered to him to maintain the cover “is not excessive”, Du Preez says.
Mr A says that when he took out the cover, the life assurer never disclosed to him that the premium could escalate so steeply.
He would not have taken out the policy if he had known he would be in for an increase of more than 50 percent 10 years later, he says.
In 2006, five years after Mr A took out his policy, the Association for Savings & Investment SA (Asisa) introduced a Code of Policy Quotations that forces life assurers to disclose how premiums may increase at the end of a contracted term or premium guarantee (see “Disclosures on future increases”, below).
Peter Dempsey, the deputy chief executive of Asisa, says if you buy a policy with a premium that is set for a period shorter than the term of the contract, you must understand the basis on which the assurer will re-price the contract: will it consider your age or other factors, such as how much it has paid out in claims?
There are no laws, regulations or codes that limit the increases life assurers may impose when they re-price contracts, Dempsey says. If your policy has a guarantee period, check the contract to see whether or not there is limit to the increase that may be imposed thereafter, he says.
DISCLOSURES ON FUTURE INCREASES
Life assurers that sell life policies on which the premiums are not set for the full term of the contract have to disclose to you how they expect your premiums will increase, an industry code on policy quotations says.
The Association for Savings & Investment SA has a Code of Policy Quotations, which includes a provision stating that life assurance companies must disclose to you the expected impact of the planned premium increase during the term of the contract.
The code says in making its disclosure to you, the life assurer must spell out the assumptions that it will use when reviewing your policy – for example, the fact that you will have aged and/or the value of its reserves, as well as the method it will use to review your premiums.
The code also deals with policies that have been priced for the term of the contract but contain a clause stating that the life assurer can increase the premium if its experience of claims to premiums makes this necessary.
It says if aggressive assumptions are used in the pricing, and it is likely that the premium will increase at the end of the policy term, the life assurer must make this clear to you, and it should illustrate the level at which the premium is expected to increase.
QUESTIONS YOU SHOULD ASK
When you take out a life assurance policy, you would do well to ask some questions about the premiums, Peter Dempsey, the deputy chief executive of the Association for Savings & Investment SA, says.
You should first ask yourself how long you want to keep your policy, and consider whether you want to have certainty about the premiums you will pay and the amount of cover you will enjoy over the term of the policy, Dempsey says.
Then ask the life assurer, or your financial adviser who presents you with quotes, to show you how the premiums and the cover will change over the life of each policy, he says.
Weigh up the total cost of the premium on the policy that gives you the certainty you need for the period you require the policy and assess its affordability, Dempsey says.
If the premium is not affordable and you need to accept a premium guarantee or review to make it more affordable, find out what the policy contract states about the terms of the premium increase at the end of the guarantee or on review, he says.
DON’T COMPARE ONLY ON PRICE
You should never compare life policies on their premiums alone because the benefits of different policies are seldom the same.
Another good reason not to compare what may appear to be two similar policies on the basis of their starting premiums is that the future premium increases may differ vastly.
Even comparing the initial premiums from direct insurers 1Life Direct, Instant Life and Frank.net, for example, requires projecting the premiums and their increases over the terms of the contracts.
1Life Direct does not increase its premiums for the first two years, and but thereafter premiums rise by five percent a year. Instant Life increases its premiums by 7.5 percent a year and Frank.net by six percent a year. All three of these assurers guarantee their increases for five years only.
Instant Life premiums could increase or decrease after five years depending on the assurer’s experience, Jan Kotze, its chief executive, says. The factors that could affect the premiums include excessive violence in the country or an epidemic, he says.
Lenerd Louw, Frank.net’s chief executive, says there is a very small chance that Frank.net would change the premium increase after five years, but having the opportunity to do so enables the assurer to get better rates from its reinsurers.
Laurence Hillman, the managing director of 1Lifedirect, says the 1Lifedirect’s premiums are guaranteed not to increase by more than 15 percent after the first five years.
1Lifedirect also has level-premium products where the premium is guaranteed not to increase for the whole of your life, Hillman says.
1Lifedirect allows you to increase your cover by 25 percent every three years or on any significant event, such as buying a home, without the need for medical underwriting other than testing negative for HIV. A new premium would be set for the increased cover, Hillman says.
Instant Life offers you the ability to increase your cover by five percent a year if you pay an additional five percent in premiums.
Frank.net currently allows you to add to your cover at a new premium, but is planning in future to offer add-on products, including one that escalates your cover annually.
Instant Life offers a cash-back benefit equal to 20 percent of your premiums every 10 years. You will need to make an assumption on whether you will keep the policy for 10 years before factoring that benefit into the total cost of your premiums.
The direct insurers’ offerings are relatively simple. When it comes to the more established assurers, the benefits and premium patterns are more complex.
Discovery Life, for example, offers policyholders who are also members of Discovery Health Medical Scheme and Vitality an initial premium discount of between 15 and 20 percent, depending on their medical scheme option. However, future premium increases then depend on your Vitality status, and your claims through Discovery Health and can erode the upfront discount.
Vitality is Discovery’s wellness programme that rewards healthy behaviour.
To determine how your premiums will increase on a Discovery policy with this integrator relative to another policy, you will have to make some difficult assumptions about your future health status and your ability to reach a particular Vitality status.
The increases are subject to caps and you can never be worse off than you would have been had you not chosen the integrator option, but you may need to consider the worst-case scenario of what can happen to your premiums when you make comparisons.
You also have the potential to earn a payback benefit equal to, or even higher than, your increases, if you keep the policy for five years, Kenny Rabson, the deputy chief executive of Discovery Life, says. Any claims on the policy reduce this payback benefit.