When you took out your life-insurance policy or signed up for disability or disease cover, did you opt for a premium that could change at any time, a premium that is guaranteed for a certain number of years or a premium that carries a compulsory increase?
Gerhard Joubert, CEO of the Life Offices’ Association (LOA), says policyholders often do not realise that guarantees may apply to their premiums or that life-insurance companies are entitled to increase risk-cover premiums at the end of the guarantee period.
Generally, where premiums are guaranteed for a certain period, your contract will refer to a review date. Joubert explains that on this date the life company will review the premium you are paying and may decide to keep it the same, or increase or even decrease it to reflect changes in claims experience.
Available premium options
In recent years, South Africa has seen a move away from life-insurance products that combine savings and risk insurance to standalone risk products providing cover for events such as death, disability, functional impairment and dread disease.
And, says Joubert, together with the introduction of standalone risk products came a new set of premium guarantees.
Before you decide on a guarantee when taking out risk cover, you first need to choose any one of the following premium paying patterns:
- a level premium with no contractual increases;
- a level premium with an annual inflation-related increase;
- a level premium with a fixed annual increase, for example 5%; or
- premiums with compulsory increases as you age.
Joubert explains that once you have selected a premium paying pattern that best suits your needs, you can opt for a premium guarantee of up to 20 years for life cover or between 10 and 15 years for any of the other risk-cover products.
Pros and cons of premium guarantees
Joubert explains that the main benefit of opting for a guaranteed premium is the certainty of knowing that premiums will not change for a fixed period, except for the increases you opted for when you selected a premium paying pattern. This means you should be able to afford the premiums for that period. However, as with most guarantees, you generally pay more for this peace of mind.
Your other option is to sign up for a policy where premiums are not guaranteed. Although usually lower, they may increase if the life company notices a long-term change in claims trends.
Joubert points out that, until now, South African life companies have not imposed premium increases on their policyholders, but points out that this could change going forward.
Reviewing premiums
He says it is important to realise that premium increases at the end of the guaranteed period are not determined by your age or medical status and that you do not need to undergo new medical examinations and blood tests.
‘Unless you have opted for compulsory increases where you benefit from low initial premiums that escalate as you age, premium increases will never be applied to you as an individual, but always to the group of policyholders that fall within the same risk pool.â€
He provides the following guidelines:
- Familiarise yourself with the premium guarantee periods that apply to your policy — the premiums could be guaranteed for a defined period only (and then be subject to a review).
- Depending on your policy, the review of premiums at the end of a guaranteed period may be subject to different conditions — make sure you are familiar with these conditions.
- When taking out a new policy, ask your financial adviser about the various available guarantee options.
- If you are unsure about the type of premium you are paying, contact your financial adviser.
- Premiums with compulsory increases as you age may enable you to benefit from lower premiums while you are young and starting out. But, you also run the risk of no longer being able to afford the premium when you are much older and in greater need of life, disability or dread disease cover. You may also have developed a medical condition, which may make you uninsurable, preventing you from applying for new cover.