Adviser can help you choose a life policy

Published Feb 19, 2012

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A good financial planner will explain to you how a life assurance policy is priced and how the premiums will change in the future, and will also help you to choose a premium pattern that will be most advantageous for you.

Jan-Carel Botha, an independent financial adviser at Ultima Financial Planners and a finalist in the Financial Planner of the Year competition for the past two years, says if you need assurance against death, he will present you with three or four policy options: usually one with a level premium, one where the premium is age-rated, and one with a compulsory annual premium increase of five or six percent.

Botha says he knows that if he then asks you to choose a policy, you will select the one with cheapest premium.

Therefore, before he asks his clients to choose, Botha takes some time to explain how the premium increases on the cheaper policies will eventually result in these premiums catching up to those on a policy that is more expensive initially, and how many years it will take to reach that point. This is often after seven or eight years.

In addition, Botha says, he will explain that if you choose a cheaper policy and constructively use the money you save – for example, by paying the difference between the lower and higher premiums into your home loan – you can increase your assets.

The aim of financial planning is to become financially independent and to accumulate sufficient savings and assets to be in a position to reduce your life assurance, or not to need it, he says.

Botha says he shows his clients where the breakeven point will be: the number of years it will take for the total cost of the policy with the lower premium and the benefit of the money saved on it to match the total cost of the level-premium policy. Often, this is some 14 or 15 years after the policy is taken out, he says.

Botha says he prefers an age-rated premium on life cover, because the savings in the early years of the policy can be put to good use. However, he is aware that the premiums escalate dangerously in later years, and not everyone can accept this.

He says taking the time to explain how a policy is priced, and the implications of that pricing, helps when clients are contacted by direct insurers or other brokers and offered policies with lower premiums. Then they are not tempted to switch simply because the initial premium is lower.

Individual circumstances also have to be taken into account when deciding on an appropriate premium pattern, Botha says.

For example, a client who will inherit a lot of money in a few years needs cover only for a short period, whereas a client whose family has a history of premature death may want to keep life cover in place for life.

When it comes to lifestyle benefits and the likes of Discovery’s Vitality programme and its impact on life policy premiums, Botha says he presents the premiums based on the best- and worst-case scenarios for clients’ health and Vitality status, and leaves them to make up their minds on their future health and Vitality status.

With the health integrator on Discovery Life’s policy, you can enjoy a premium reduction of about 50 percent initially, but could then face an increase of 24 percent annually, he says.

Ian Beere, an independent planner with Netto Financial Services and 2007 winner of the Financial Planner of the Year award, says given all the benefit and premium options, an adviser can present clients with endless alternatives. It is therefore important to use a sound framework when making recommendations.

Generally, life assurance is a grudge purchase, and clients either want to pay as little as possible or they cannot afford higher premiums, he says.

Therefore, Netto often recommends life policies with a compulsory annual premium increase of five percent a year, because the initial premiums are at a discount of 25 to 30 percent to those of a level-premium policy.

This results in an affordable premium that also reduces client’s vulnerability to being coerced into switching to a product which is cheaper now but more expensive in the long run, Beere says. He says clients who enter a level-premium contract need to clearly understand the fact that the product is more expensive now but more sustainable in the long term.

When it comes to dread disease cover, which has to stay in place for longer than life cover, Netto will often recommend a level-premium policy, he says. Planners at Netto are also also very wary of replacing old-style dread disease policies where claim criteria are easier than those in a replacement policy.

To weigh up the cost of one premium pattern relative to another, you have to cost the policy over the period for which you are likely to need it and then consider the present value of the cover, Beere says. You can have the best of both worlds by using two layers, Beere says, with some cover on a level-premium policy and some on a policy with a compulsory premium increase.

As you build up your retirement savings and your children grow up, the need for cover reduces. Beere says the policies are then structured so that you can cancel the compulsory-increase policy as it becomes expensive in later years.

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