23 Mar The Best Way to Save Money on Insurance
That’s the big thing on everyone’s minds with insurance, isn’t it – how can I reduce my costs? The first thing we think of doing is cutting back the amount of cover, cutting back any extra benefits on the policy or even cancelling. There is a way to reign in your premiums before they get out of control though, it just means putting some thought into what is important to you.
For the majority of Australians there is a long-term need to make sure they can protect themselves with proper, advised, strategic life and/or sickness & injury cover. Long term for us as advisers means more than 10 years. With that number in mind you can see why a lot of people might need to protect themselves against death or disability for the long term.
So, how can you keep costs manageable? It’s in the way you pay your premium.
Stepped premiums means each year your insurance premiums go up like a flight of steps. This is because the premium is related to age. When you’re young, the premiums are cheap because your chance of claiming is statistically low. As you get older though the premiums start to skyrocket because your chance of claiming increases.
These big premium increases mean a lot of people start cutting back or cancelling cover when there is a still a strategic need to be insured for death or illness & injury and so they leave their entire financial future at risk, but the premiums are just unaffordable.
The premium jumps tend to happen into your mid 40’s and onwards but you have probably noticed your premium increasing by at least 10% each year even if you are in a younger age group.
So why do people take out stepped premiums if they know a big premium increase is likely? Because it’s so cheap to start out with and they haven’t considered their potential need for insurance beyond their immediate situation.
The other way of paying your premiums is on a level basis. This means that the premium is not related to age and remains relatively stable (level) over the life of the policy, only increasing with CPI/Indexation.
Level premiums are extremely useful and cost-saving where you will need the cover for more than 7 years or so. This is because level premiums do cost more than stepped premiums in the first 5-10 years of the policy, sometimes double the cost, but over time the premium difference is phenomenal.
Why would you take out level premiums if the cost is higher than stepped? Putting cover on level premiums is the right choice when you know you’ll have need for an immediate capital-creating asset (insurance) in the event of death or sickness & injury, and where you know you will need at least some insurance for at least the next 10 years.
What might be indicators you need death or sickness/accident cover for more than 10 years?
- You have young children or dependents who would require support
- You have debt that will not be repaid within 10 years
- You will be working and relying on your personal exertion income for more than 10 years
Let’s run the numbers
The true cost of stepped and level premiums can only be understood with a real-time example.
Let’s use Alex as our example. Alex is a 35-year-old male, who doesn’t smoke and knows he will need $500,000 life insurance to ensure his wife and 2 young daughters are provided for in the event that Alex passes away unexpectedly. With the help of his adviser he has realised he will need life insurance for more than 10 years and wants to make sure his premiums are good value and cost-effective.
How does $500,000 Life Cover on level premiums pan out?
As you can see in the illustrations the long-term cost savings of level premiums are incredible. Yes, the upfront costs appear higher on level premiums but if you want to be smart about how you spend your money on life or disability insurance level premiums are the way to go. If Alex wants to hold his life insurance all the way to age 65 (when level premiums expire) then he can rest assured knowing that he will be able to financially sustain it and will also be able to budget better.
Any life and/or sickness& injury cover can be put on level premiums and when discussing your particular situation we can do all sorts of structural arrangements, including looking at a split portfolio where some of your cover is on stepped premiums and some on level premiums – sort of hedging your bets by ensuring some cover for the long term (level premiums) and having cheaper cover earlier on whilst your need for cover may be higher than in 10-15 years time (stepped premiums). It all comes down to having an in-depth discussion with your adviser.
If you want to explore level premiums please let us know, with the way premium costs are headed level premiums are a smart choice. If you wish to discuss your current cover set-up and options please contact us
Please note this information is general advice only. Please seek advice before acting on any information in this article.