Financial advice critical to navigate the life premium minefield

Gareth Stokes, FAnews Online Editor

There is a wonderful Afrikaans saying that goes: Goedkoop is duur koop! Roughly translated it means that bargain hunters end up paying dearly for their thrift. The saying holds true for many purchasing decisions, including life insurance. Life insurer Bri

Their study confirms that local life insurers offer unparalleled choice when it comes to structuring life and disability premiums. In the executive summary of the report, they observe: “The increasing commoditisation of life insurance cover has been one of the drivers [of the] divergent premium patterns generally offered by South African life insurers.” The commoditisation of insurance is the reason the research team was able to obtain 126 quotes, with different premium patterns, from four of the country’s major providers of risk cover. The quotes provided for life cover (whole of life), lump sum disability cover (up to age 65) and income continuation cover (up to age 65) for a number of hypothetical insured lives (split equally between male and female lives and with entry ages respectively at 25, 30, 35, 40, 50 and 60).

A tough choice for an unassisted consumer

“While increased choice is generally beneficial for the consumer, there is a risk that consumers might be tempted to simply select the cheapest initial premium for their desired cover level, without having proper regard for the future premium increases that are required under that policy,” observes True South. The big unknown is whether consumers who accept a life insurance quote with the lowest initial monthly premium are aware of the likely premium increases! Monthly premiums on these policies can rapidly escalate, become unaffordable, and lead to a forced lapse! The report highlights the value of proper financial advice at policy inception. A financial advisor can ensure that the consumer makes a fully informed decision that strikes a balance between current and future affordability of the policy.

The value of advice is further supported by the study finding that policyholders could spend 60% more than necessary over the lifetime of a policy by choosing a more aggressive (cheaper initial premium) funding option. What starts out as a small premium saving on a more aggressive premium pattern often grows to a 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.

Calculating the lifetime cost of cover

The survey assessed the various providers and premium patterns against two important concepts, namely lifetime cost of cover and share of wallet over time. The former considers the total cost of cover over the lifetime of the insured and quantifies the value that builds up over time, while the latter expresses the change in spend over time as a percentage of the insured’s income. True South provided examples to illustrate each concept.

A 25-year old female who selects a cheap initial premium policy could initially save R125 per month. It emerges that her lifetime cost of cover on this option exceeds that on the most expensive initial premium option by R139 254 – 50% more than what it would have cost! The monthly premium on the cheaper option became more expensive than the more expensive premium options from year eight onwards. 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.

To illustrate the impact on share of wallet the group considered a 40-year old male selecting the lowest initial premium, with the most aggressive annual increases. He will initially spend 4% of his 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.

Approach “cheap” solutions with caution

Paul Zondagh, who led the research team at True South, said: “The findings reveal 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 their wallet eventually consumed by their premiums.”

“The comprehensive study confirms the value of proper advice at the outset, to ensure your chosen premium pattern is affordable and sustainable in the long-term.”

Editor’s thoughts: The Brightrock and True South study on premium patterns in the domestic life insurance space confirms what we have known all along: Buying an insurance policy on premium alone is a bad idea. The value of financial advice is again proven in that consumers left to their own devices tend to favour options with negative long-term financial consequences. Are you concerned with the wide differences in life insurance premium patterns revealed by the survey? Add your comment below, or send it to gareth@fanews.co.za