Insurance Premiums always increase – Myth or true?
Sure enough, as it is always said of Taxes and insurance premiums that they never go down.
I can’t comment much on taxes save that company tax rate went down in 2009, but for insurance premiums its definitely not true in all cases.
Let first talk about why this happens!
Rate for Age or Stepped Premiums
Most of the times when insurance premiums go up every year, its due to premiums that are set up for increasing based on age. This means the older you get the increase in premiums is inevitable. While this allows one to keep the premiums at low cost and cover liability short term, long term it becomes unaffordable.
This is where one can fix their premiums at a fixed cost for insurances like life, Trauma, TPD, Income protection, mortgage protection, premium cover etc. There is no medical cover at this stage that is offered at level premiums.
Whats the catch?
The levelled premiums are usually expensive compared to stepped premiums. Usually twice the cost. So why should one look at level premiums?
Here is the math for Life and Trauma insurance:
Generally you would end up paying the same amount of premiums in 10 years anyway.
If the insurance has to be set up for more than 15 years then the cost savings can be as dramatic as half the cost of stepped premiums (depending on how long the premiums are levelled for).
Pitfalls for Levelled Life insurance Covers
While its great to make all the savings that could accumulate in insurance costs and even better levelled cover is like betting against the house and winning! But as usual the devil is in the detail.
While insurance companies may offer Levelled life cover not everyone offers Guaranteed rates. What does that mean?
Well if the insurance company has to increase insurance premiums due to increase in taxes or wether they have decided that they are going to increase the rates for everyone they have issued policies to, this is called rates increase.
So if we have levelled cover and we do not have gauranteed rates on the Life insurance policy or Trauma policy specifically then it just beats the purpose of getting levelled cover in the first place.
Lets take an example to understand how the whole level premiums works. Say a couple John and Jane age 40 has stepped life cover 0f $400,000 and Trauma cover of 200,000. The cost is usually around the $75 per fortnight.
Now lets while this is affordable. Past 55 years age the premiums will practically go up to the $250 mark fortnightly.
By age 65 for the same amount of cover the cost will go up to $600.
Now if things are not planned out well, insurance is usually cancelled and the house wins!
But this will apply to the circumstances when we consider insurance as a bill and do not look at it as long term investment.
Now the flip side to this is levelled premiums. This will not only fix the cost today. But for the foreseeable future it allows you to retain a decent amount of cover without the yearly premiums increase.
Lets be honest, past 60 years age, how many people actually see an income rise. For that matter how many actually keep a high paying job!
Believe me when I say this, I’ve heard it many time and from pretty much every one:
I’ve got my insurance sorted !
Well honestly, if all this sounds new to you, then this is the reason to give me a call and discuss your situation. We will provide you with a hassle free and Zero cost financial review.
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