When life cover starts costing an arm and a leg

Sylvia Walker | 16 October 2023

Sylvia Walker is a financial planner at Andrew Prior Consultants. She spent many years in a senior management position at Old Mutual before venturing out of the corporate world. She is also a freelance finance writer and author of several non-fiction books.

Finding out that your life cover (or other risk product) premium has become unaffordable could leave you despairing, particularly if you really need the cover.

It’s not an uncommon scenario – a premium that increases with age coupled to annual benefit increases means your premium could easily double in 10 years and triple in 15 years. It’s impossible for salaries to keep pace, so your premium consumes a larger percentage of your budget each year until you reach breaking point.

What can you do?

If you’re faced with this situation, there are a few options:

  • Cancel the policy and shop around for a cheaper one (which is fine as long as your health hasn’t deteriorated);
  • Stick with the policy but reduce the amount of cover; or
  • Request your insurer to keep the premium level going forward. Not all insurers offer level premiums, and going this route may initially double your premium as the policy is repriced at a level premium rate.

A risk policy is a promise to pay out if a certain event happens, but it is of little use if you are forced to cancel it because it is unaffordable before you can actually claim.

How big is this problem?

It is not clear how often consumers find their premiums becoming unaffordable. Insurers regard the number of policies that lapse as competitive information and report the numbers only to the regulator, the Financial Sector Conduct Authority, and to their industry body, the Association of Savings and Investment South Africa (ASISA).

Momentum says the average long-term lapse rate in the industry is less than 10% annually.

ASISA reported recently that 4.3 million  out of 40 million risk policies lapsed between January and June this year and this “high lapse rate” was “a reflection of the country’s economic situation and the severe financial strain faced by many consumers on the back of rising interest rates”.

As there are many reasons why policyholders allow cover to lapse, the lapse rate doesn’t provide insight into the impact of increasing premiums.  

What drives premium increases?

Risk cover is complex and various factors impact on premium patterns:

  • Whether it’s cover for a certain time period (such as cover for a home loan) - called term assurance, or for the rest of your life – known as whole life cover. Term cover is generally cheaper than whole life cover, particularly when you are younger.
  • Whether the cover amount remains level or increases to keep pace with inflation.
  • Whether premiums are level or increase as you age – known as age-rated premiums.

How your cover is structured impacts on the premium when you sign up, and how it will increase in future. Read more: How will my premiums increase?

Affordability plays an important role. You may not be able to afford the cover you require on a level premium, so you have no choice but to select an escalating premium, explains George Kolbe, head of retail life insurance marketing at Momentum.

“Clients who can afford to pay for the cover they need with a level premium tend to be able to keep their cover in place for longer, compared to those clients who rely on escalating premiums to afford the level of cover they require. This is more a reflection of income and affordability than whether one premium pattern is more appropriate than another.”

Cheap now but pay the price in the long run

Age-rated premiums are generally the cheapest at the outset - younger people pay less for cover and older people pay more, which seems fair. However, the long-term effect may not be as rosy.

In 2012, BrightRock contracted True South Actuaries to do an analysis of premium patterns.  The research showed that choosing the cheapest premium upfront could cost as much as 74% more over your lifetime, compared to choosing the most expensive premium upfront.

The cost is affected by the age at which you take out cover and how aggressive the premium patterns are. The report concluded that unless you only need cover for a short period of time, picking the lowest premium could be a poor financial decision. This highlights the value of getting advice when you take out cover.

Cover conversations

The starting point of any discussion around life cover should be what type of cover you need and why.
 In most cases, it’s to protect your family’s lifestyle from a loss of income, either as a result of death or permanent disability.

“Most people’s single biggest asset is their ability to earn an income for the rest of their lives,” says Clyde Parsons, chief innovation officer at Brightrock. 

The amount of cover you need is a factor of the income you could lose (or the monthly expenses such as groceries, bond repayments, school fees, etc, you need to provide for) and a fixed time period, he explains.

In addition, as people age, they build up assets which reduce their dependency on life cover, David O’Brien, managing director of Meerkat, says. “Someone who reaches their 50’s or 60’s probably no longer needs a massive amount of life cover as they have built up other assets.”

Life cover is not a one size fits all, but traditionally it is sold as one amount that covers all eventualities. In reality, there may be different reasons and solutions, and some insurers have structured their risk benefits to match the policyholder needs, which could range from providing for daily expenses to providing for estate duty on death.

Spotlight on advice

Risk cover is largely sold, rather than being bought, so financial advice plays a key role. You and your insurer have different information, according to O’Brien. You don’t know how long you will live for and what impact your death will have on your dependants’ lives, and how your disability will impact your life and your dependants’ lives. The insurance companies only have statistics on large groups of people on which they base their premiums.

Financial advice is firmly regulated and includes the requirement that you understand the implications of the purchase of any financial product. This means your adviser should consider the implications of future premium affordability and explain these to you.

Advisers are remunerated for selling life cover. Premiums that escalate aggressively start with a lower premium, and hence commission, but do pay renewal commission on each increase, thereby generating an annuity income for the adviser, provided you keep paying the premium.

If you cannot afford the future premium, then both you and your adviser lose out. “Having a quality trusted adviser with your best interest at heart is really a crucial part of the buying process,” O’Brien says. Read more: How can I find a good financial adviser?

Possible solutions

Ensure that you are more informed about the options and the implications and be prepared to pay more initially for the level of cover you require.

If you really can’t afford to pay for the cover you need, an escalating premium may be the only solution, but then opt for a fixed percentage premium increase, which is more predictable, Kolbe advises. “Selecting a premium pattern that reflects expected future inflation and earnings can ensure that the premiums stay affordable over time.”

Your adviser needs to be honest and frank about the implications and must make sure that you understand the future impact of cheaper initial premiums. The ah-ha moment often comes too late, giving the financial industry a bad name.

There is an old saying that life cover is the best investment you can make. This is true, as long as you can keep paying the premiums until you need to claim.