Policyholders who take out lump-sum disability cover cancel much of their cover before they reach retirement, which means that they will have paid more for their cover from the date on which their policy started than was necessary, life assurance company BrightRock says.
BrightRock has designed its cover to be flexible, to match your changing needs more closely and avoid what it calls “wasted premiums”.
Schalk Malan, BrightRock’s product actuary and director, says life companies’ claims statistics show that, as policyholders’ need for lump-sum disability cover decreases as they approach retirement, they are cancelling large amounts of cover.
Despite the need for cover decreasing, the risk of disability when you are 60 is nearly nine times higher than it is when you are 40, Malan says.
But claims statistics for 2013 show that claims paid from lump-sum disability cover did not increase between the ages of 40 and 60; instead, claims by policyholders over the age of 50 were 85 to 95 percent lower than expected. Malan says the explanation for this is that policyholders had significantly reduced their cover in line with their reduced needs.
The reduction in lump-sum disability cover later in life has been confirmed by studies by True South Actuaries and Consultants, he says.
Most policyholders use lump-sum disability policies to cover needs that exist for a specific term and decrease over this period – what is known as “decreasing term” needs, Malan says. Cover that decreases over the term of the policy is cheaper than cover that is priced to increase for the full term, which could be until you retire or your entire life, because the financial risk to the life assurer decreases over time.
Ideally, cover for a home loan, or to finance your children’s education, or to replace an income, should be decreasing term, because the loan reduces as you pay it off, the total cost of education will decrease as your children grow up, and the number of pay cheques you would need to replace your income if you were disabled and unable to work decreases as you approach retirement.
If, for example, you take out lump-sum disability cover of R1 million at the age of 30, it is likely to include an annual increase to take account of inflation. As a result, the cover will increase, rather than decrease, as you age, despite the fact that your need for the lump sum will probably decrease over time. As you get older and approach retirement, your broker or financial adviser is likely to advise you to cancel some of the cover. As the cancelled premiums were priced for the full term for which could have had the cover, the portion of what you have paid is wasted.
If, later in life, you reduce your lump-sum disability cover and re-allocate the premiums to, for example, critical illness cover, you may find that you are less insurable and will pay more for the cover than if you had taken it out when you were younger.
On the other hand, if you had bought cover that was structured more efficiently from the start, you could have paid lower premiums, Malan says.