TAL group chief executive Jim Minto said that level premiums are comparable to fixing mortgage rates – which allows for better household budgeting – but that consumers are overlooking the pricing method for stepped premiums which have a lower initial cost.
“Australians are familiar with fixing their mortgage rates and locking in utility rates to manage costs, but are more reluctant to fix their life insurance premiums which, in the long run, usually end up cheaper overall,” Mr Minto said.
“We have found that while most people choose stepped premiums for their life insurance which rise with age, they are overlooking level premiums which stay the same.”
“Although level premiums initially start higher than stepped premiums, they can provide households price certainty for the future because families don’t have to find extra funds each year.”
In its initial submission to the FSI, TAL recommended changes to insurance premium regulation to help promote the merits of level premiums.
It also recommended that policies sold to people on benefits for fixed incomes, such as pensions, be level premiums only.
Mr Minto said consumers are continuing to voice concerns about rising costs and budget pressures, which is why many opt for stepped premiums.
“But one of the problems with stepped premiums is that people can discontinue their valuable cover as the price increases more in later life, and they may even stop paying for their cover at a stage in life when they actually most need it,” Mr Minto said.
“Stepped premiums are in many cases suitable, particularly where the need is shorter term, but level premiums provide pricing certainty and predictability over the long term.”
I recommend Level when appropriate and affordable, particularly with long term products like income protection. Break even points move around
There are issues to watch. The automatic upgrade provisions are dodgy with some insurers. Only 1-2 insurers offer genuine level premiums where the CPI increases are also at the locked-in rate at entry
Most clients presented with a good year-by-year graph and year-by-year table, with transparency, will consider the issue of long term savings
Many presentations are frankly usesless. Year by year is the ONLY method
Depending on the individual’s circumstances, I have often been in favour to recommend level over stepped premiums.
Generally for the younger clients, who are in good health and able to lock in their policies at affordable premiums, relative to their income.
Some of the other benefits include the savings on cumulative premiums when level is chosen over stepped, assuming that the policy is held for the long term and at its current pricing (which can vary).
Some of the risks for choosing level over stepped premiums, are the assumption that level remain constant, whereas stepped increase over time. But, I have noticed recently that an insurance company has decreased its Life insurance premium, which is nonetheless a great outcome for the consumer.
I have never recommended a level premium. Whenever I look at comparison graphs it takes up to 15 years to catch up to stepped premiums. Now generally speaking, a client incurs large levels of debt and dependants when young…and as they get older and also earn more the debt reduces, the dependants needs like education won’t be as lengthy and may in fact be complete. The client can most likely reduce the sum insured in which case those level premiums are wasted. Oh and what happens if the client claims after like year 5…we forgot that didn’t we. I think the actuaries are hoping that a client won’t claim in which case level premiums are freakin great for profits.
Not to mention, a better product could present itself in the interim as Jason alludes to.
The other issue with Stepped vs Level premium is that many providers Level premiums are not actually level. Many of them still rise in the first few years and can take up to 10 years (depending on the initial age of the client when the cover is first taken out) to catch up to the cummulative cost of an equivalent stepped premium.
But the biggest issue is the re-adjustment to premiums that many providers’ older products become subject to. If my memory serves me right, TAL are one of the main culprits in this regard.