Policy anniversary letters, why does the premium always go up?

This is a common comment I hear from clients, that and 'It's got too expensive can you do some thing about it?' If you are a Willowgrove client you are likely to be getting your first or possibly your second anniversary letter from the insurance company, so this is relatively new for you, if you did not have insurance cover before we met.

The simple answer to the title is; you are a year older and age is part of how the insurance company assess risk. Bluntly put, being a year older the chance of you claiming has increased.

What is not always understood with the annual policy renewal is your cover level has probably increased too. In recent times the level of cover increases have been up as high 5% inflation, though the last couple of years have been a bit lower.

It is more than just age?

Yes. To break it down for you:

Your existing cover amount has moved, let us say you had $100,000 of life cover. With a 5% cost of living increase, you now have $105,000 of life cover. Straight off the bat without any age changes, your premium will increase in line with the inflation rate, in this case by 5%.

Compound this with the change in age related premium and all of a sudden, you have a bit of a jump in overall premium. I have seen some premiums for older lives move at 13-20% per year for the age related risk, these increases can be substantial.

I am hearing 'How can I afford to have my cover when I am older and need it?'

This is often a panicked thought, but it is not something to get too concerned about. Keep in mind, insurance is about covering the financial loss as you get from point A to point B. Often for most people it is to get from 'now' until retirement, protecting income & lifestyle, and covering off debt. As you get older the value of future earnings, at your current income, diminishes, as does the debt you are paying off, normally your mortgage and assuming you have not borrowed more.

By regularly reviewing your cover you should be able to reduce your overall cover amounts, as factors for debt and future earnings reduce. While this may not quite maintain premiums at their current level, it can reduce the premium increase shock and cash flow impact long term. You really do not want to be over insured, the extra benefit is probably not a huge part of the equation and the increased premium just hurts your cash flow. If you get to the point you do not need the cover and you have not claimed, the over insurance just becomes a waste of money.

While on the subject of regular reviews, if you have indemnity income protection it is very important that your review this regularly. What most people miss with indemnity and loss of earnings policies is you have to prove the loss at claim time. On your renewal letter, it looks good that your income protection has increased. If your gross taxable income has not increased in line with this increase, you are potentially paying a premium on a benefit you cannot claim fully.

There are many trains of thought on insuring incomes, ours is to source agreed value income protection where we can. The primary reason for this is to ensure there are few to no surprises at claim time, if the loss of income is difficult to prove or unable to be proven. There are many reasons this might be the case, the one we are most concerned about is the longer-term drop in income due to a developing disability. A condition like MS is a good example, where your ability to earn can be compromised before your ability to work, especially if you are self-employed. Proving a loss at claim after a protracted decline in income can be difficult and can leave policyholders disillusioned if this is the case. Again regular review of your income protection means these situations can be managed to ensure you have both the cover you need and a premium that is manageable.

Back on the subject of managing your premiums. What else can you do?

You could fix it, like your mortgage; there are fixed premium insurance options available. While mortgages are focused on the short term, 6 months to 5 years, fixed rate insurance is focused on the medium to long term. We have options available to fix your cover at a rate that is more suitable to the term you expect to hold it over. From rates that can be maintained for 10 years through to age 65, 80, 90, 100 and even for nominated age or time frame in between.

The most common approach is fixed rate life cover, which makes sense if you have a need through to retirement or longer, most insurance companies have this as an option. For your existing cover we can often access this without exposing you to further medical underwriting with your current provider. For existing Willowgrove clients, this will be a discussion point with your review meetings.

With your other insurance benefits, like trauma and income protection, we have some providers who offer fixed rate cover, but not all. This area has quite a bit of discussion within the industry. Are the rates guaranteed or not? Some are and some are not. This can be an important consideration, we have seen up to 20% additional premium on a guaranteed policy vs. an un-guaranteed policy doing similar things.

It does beg the question is it worth paying the extra premium?

If you need absolute certainty about future cost, yes, but you will pay more for it. If you have some flexibility if there is a need for the insurer to change it, maybe not and keep the money in your pocket, is probably in your favour. One provider, who has a level premium trauma policy, recently commented 'It has been on that rate for 7 years since we launched it and there is not any pressure to review premiums, we think we have it right.' This would suggest paying additional premium to have a guarantee is not always in your favour. The other aspect to implied guarantees is where there is a guarantee on the premium but it is subject to underlying insurance company premium adjustment, not just for you, but all policy holders, or able to be adjusted if there are law changes. This does undermine the extra premium paid for a guarantee if it is guaranteed.

What is the point of a fixed rate cover if it can change?

Valid point. The insurance company is pricing the future risk and charging you a premium for it, based on a complex number of factors. What they figure for your fixed premium is unlikely to change as much as an annually calculated premium due to the fixed intent of the initial policy and the longer term view when calculating it. Regardless of premium structure, the insurer knows what insuring you costs, either way it is quite similar, all we are doing is managing the way you pay for it. Cheap now in the short term or more manageable over the long term.

Is fixed cover likely to be more expensive now?

Yes it is. By flattening off the future costs, you do pay a higher premium now for a more manageable premium in the future when compared to the yearly reviewable premiums. Keep in mind this is about structuring your cover to suit your needs, it is unlikely all of your cover needs to be fixed long term. A recent comparison for a client looking ten years out, the annual renewable cover was about $27,000 per annum, with the fixed term cover was about $20,000 per annum, obviously both will be a challenge to afford, but the fixed one will put them in a better position over the long term. They also have a plan in place not to need as much cover in ten years time as they currently have, along the lines with my comments above.

How will this really help me over the long term?

It depends on what age you take a fixed premium option and for what covers. The younger generally the better for long-term savings. One of my own policies I fixed when I was in my 30's. If I live forever, as I intend to, I will not need it and I've minimised the cost for at least the first 50 years. About $24,000 in premiums vs $264,000 for the same cover over the 50 year term.

If you want to explore your cover options for long term affordability get in touch. You do not want to be one of the people who cancel their cover before you can claim it due to premium cost.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at anytime without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.