A new True South study spotlights the lifetime cost of life insurance

* Policyholders are spending up to 60% more than necessary over their lifetime by choosing aggressive funding patterns. * Those who pick the lowest initial premiums could be forced to lapse their policies as their premiums become unaffordable over time.

Price play can significantly affect the sustainability and affordability of life insurance for South Africans, who are already underinsured by an estimated R1.3 trillion.

A comprehensive study, released today, found cheaper initial premium options become more expensive due to aggressive annual increases that are well above inflation.

Premium patterns are the long-term increases on life insurance policies. Policyholders have options to purchase cover with different premium patterns at the outset. It is at that stage they should ideally strike a balance between current and future affordability.

The study, compiled by True South Actuaries & Consultants and commissioned by new entrant BrightRock, also found that generally what starts out as a small premium saving on a more aggressive premium pattern, might eventually grow to a much more significant percentage of the policyholder’s income. By contrast, the share of wallet of a higher initial premium, with less aggressive future increases, in certain instances even reduces over time.

Findings revealed policyholders were in some cases spending 60% more than what the more expensive initial premiums would have cost over their lifetime.

Findings: some examples

Lifetime cost of cover

A 25-year old female can initially save R125 per month, but in doing so will spend R139 254, 50% more than what the most expensive initial premium would have cost over her lifetime. The initial cheaper option became more expensive from year 8 onwards.

Share of wallet over time

A 40-year old male selecting the lowest initial premium, with the most aggressive annual increases, will initially spend 4% of income on the premium, increasing to 13% over 40 years. Had he chosen the higher initial premium, with less aggressive annual increases, his initial spend would have been 5% and would still be at that level after 40 years.

Extra lifetime cost

At age 25 at entry, the additional percentage a male could spend over the lifetime of his policy by initially choosing the cheaper, age-rated option could range between 6% and 47% across providers.

Paul Zondagh, who led the research team at True South, said: “The findings revealed that consumers need to carefully consider the implications of the choices they make when deciding how their long-term life insurance needs will be funded.

“In most instances, for consumers who select cheaper initial premium patterns, policies with initial small savings become significantly more expensive when viewed over the lifetime of the insured. Consumers who choose higher initial premiums experience lower increases in the portion of the portion of his wallet consumed by their premiums.”

The study looked at premium patterns across gender and at different entry ages from 25 to 60. True South obtained 126 quotes, using different premium patterns, from four of the major providers of risk cover under the Long-Term Insurance Act.

Said Zondagh: “The comprehensive study revealed the value of getting proper advice at the outset to ensure your chosen premium pattern is affordable and sustainable in the long-term.

“Thanks to these findings, consumers have a chance to review and scrutinise their current policies and future needs.”