True level premiums refer to insurance premiums that stay the same as one gets older as opposed to premiums that are stepped to increase with age, and the perceived added risk a customer poses.
Stepped premiums can be seductive because they often start off low for someone in their twenties, but of course have a major impact on expenses later in life, often when we are less able to afford the increases. Generally speaking, if you hold a policy for more than 10 years, there can be significant savings by starting with a level policy from the outset.
But how level are level premiums?
The level field you think you’re operating on might be tilted towards an insurance company’s goals a little more than you think.
Some companies do offer what can be described as True Level Premiums. That is on the original sum insured the premium rate option will not increase as the client’s age increases.
If a policy is increased by the Consumer Price Index (CPI) each year, the increased portion of cover will continue to be charged to the client based on their original age next birthday from when the policy commenced.
How do true level premiums work in practice?
Other companies offering level premium options, charge the client a premium rate based on their age when they received the CPI increase, not the age when they actually took out the policy. What this means is that each year as an indexation increase is accepted, a higher premium rate for that age is charged for each increase to the sum insured. Over the long term this means a sizable difference in your total payable premiums.
Ok let’s look at a hypothetical so we can see the real dollars and sense of it.
If a client takes out $100,000 sum insured at age 34, an insurer might charge them a level premium for that $100,000 based on their age of 34 for the duration of the policy. With a true level premium, when a client receives a CPI increase of $3,000 (assuming 3% CPI) the following year they will be charged for the $3,000 based on the level premium rate when they took the policy out or the same rate per thousand as a 34 year old client.
Other companies might charge a client on indexation a level premium rate based on a 35 year old level premium and the following year for the increased CPI cover that they will receive they will be charged a level premium rate for a 36 year old, and so on. There are a very small number of companies in the market that offer a true level premium rate option.
What we have seen a lot of in the last few years is insurance companies having a general price increase across all their products. If you have a level insurance premium policy, you might think you are immune to this price rise, but think again. If insurance companies have a general price rise that is likely to be passed on to you. If you are on level premiums though, you will only be charged a new price for the age that matches your age when you took out the policy (not your current age).
As mentioned previously Level premium policies can provide clients with significant cost benefits over the longer term compared to stepped premium policies. With these savings, level premium clients enjoy a position of increased affordability and therefore ability to maintain their levels of cover.
To help you find a company that provides a true level premium, which means you get charged the same base premium as indexation occurs, as when the policy commenced, get in touch with a Spotter Life consultant today.