Matching different premium patterns to the different needs of individual clients can maximise both the initial affordability and the long-term sustainability of the funding of protection benefits.
Lifestyle protection benefits typically cater for needs that are long-term in nature. If a client needs protection against the lifestyle impact of a critical illness now, the need after retirement will be even greater.
Funding lifestyle protection
Long-term needs are best funded with a level premium pattern, says Francois Tranter, Head of Risk Technical Marketing at Momentum Risk and Savings. “As this is the most sustainable funding option, clients would still be able to afford their cover later in life.”
Petrie Marx, actuary in product development at Sanlam, agrees. “Because of steeper increase in cost at old age for lifestyle protection benefits, some form of ‘pre-funding’ is often considered appropriate, in other word, funding such a benefit on a so-called ‘level’ premium basis.”
Funding income and asset protection
There is no hard and fast rule on what the best way is to fund income and asset protection benefits, comments Patrick Sheehy, Head of product management at Glacier by Sanlam. “A good financial intermediary will take the time to precisely understand a client’s needs and make a recommendation on how much cover is required to provide an income and how much is required to cover outstanding debts or other once-off expenses.”
“Whether different funding methods are used to fund income and asset protection benefits is purely an advice or value for money consideration,” adds Marx. “For example, a client may feel that he/she can afford an increasing payment structure for certain benefits during a working career, and may therefore favour a lower starting rate.”
Income and asset protection benefits are generally not needed for whole of life, so long-term sustainability may be less important, notes Tranter. “A compulsory increasing premium pattern can therefore be considered, which would make the initial premium more affordable.”
Other options?
Francesco Joshua, Head: Risk Solution, Metropolitan Employee Benefits suggests that clients could look towards saving as an option, but it may take a few years for sufficient funds to be built up. “This means that insurance is necessary. A group insurance product should provide for some level of basic cover and then individuals could source the necessary additional cover as required in the individual market. The group insurance market is well established on the income and asset protection side and individuals have access to the individual market to buy additional cover depending on their needs.”
Clients’ needs paramount
Dr Dominique Stott, Business Executive at PPS, believes that the premium pattern used to pay for any benefit depends entirely on the needs of the client. “A level premium will initially appear to cost the client more, so the issue is around initial affordability. But in the long term it will cost less than a compulsory or age rated premium pattern for the same amount of cover. Compulsory or age rated premium patterns could be used for clients who require a certain amount of cover initially and know that in the long term they will be able to afford the increases in premiums, taking into consideration the time-value of money.
“For these reasons, it is imperative that clients consult with an accredited financial intermediary who will be able to assist them with an investment plan most appropriate to their needs,” says Sheehy.