In this second article on life insurance, I look at level versus escalating premium patterns, why you get what you pay for, and how life cover fits into your long-term financial plan.
Here’s a quick recap from last week (“Understand these basics before buying life cover”, Personal Finance, June 14, 2025). Insurance companies price their cover according to the risk you pose of claiming, which is assessed in the underwriting process. There are two levels of underwriting: initially at a generic level, where policyholders with similar attributes (age, gender, education, work status, and smoker status, among others) are grouped in an underwriting pool; secondly at the individual level, where your personal health status is assessed. Premiums are determined according to actuaries’ risk assumptions of the underwriting pool and then adjusted on an individual level if you have specific health issues.
The pricing at pool level is not guaranteed for the life of the policy – policies typically come with a guarantee period of five, 10, or 15 years, beyond which the risk of the underwriting pool is reassessed, resulting in a possible increase in premiums across the pool.
Premium patterns
Verlyn Troskie, head of retail distribution at boutique asset manager Sentio Capital and an accredited Certified Financial Planner with a deep knowledge of financial products, explained that insurers have different ways of pricing cover to suit different needs.
Premiums may be level or may escalate annually according to inflation and age. For your cover amount to keep pace with inflation, you may have the option of a voluntary annual escalation of, say, 5%. Thus, your cover amount will increase by 5% a year, as will your premiums. At any time during the life of the policy, you may cancel this voluntary escalation.
You may also opt for an age-related premium escalation pattern, which makes your initial premium lower, but which results in an annual escalation over and above any inflation-linked escalation, of, possibly, another 5%. This escalation is built into the pricing and may not be voluntarily cancelled.
The problem is that premium increases compounding at, say, 10% a year, may result in your cover becoming unaffordable after 10 or 15 years.
Although these patterns would be made clear in the policy document, with examples of future pricing, an adviser intent on selling you a policy may focus on the low initial premium, disregarding how the rising premiums may affect you in the future.
Troskie says that on a level-premium pattern, the premium is higher at the start. “When brokers are competing for business, they will generally not go for the level premium because it will price higher. But the level premium forces you to pay a larger portion of your risk expense upfront so that the increases don’t compound you to death,” he says.
Cheap can be pricey
Troskie says you also need to be careful when deciding on a quote. Typically, an adviser will get you three quotes from different providers, and it’s natural to opt for the lowest. “The problem here is that when you go with a company that charges a very low premium compared with what the market charges, you have to stand back and ask why. How are they pricing risk in order to give you this low premium? That is something the client doesn’t understand and it’s something the adviser often doesn’t explain,” he says.
Troskie says insurance companies share their claims statistics, although there may be discrepancies in the claims ratios of different companies. “If the average quote comes in at say, R900, and one company comes in considerably lower at, say R700, you must ask why the premium is so low. What are they not pricing in? At what point am I going to pay the price for the low premium? Will it be a rejected claim? Will it be some massive increase in the future, at a time when I cannot afford to take out new insurance or when I am uninsurable? Because at some point you’re going to pay the price,” he says.
Life cover and financial planning
Theoretically, life cover is something you need for a particular window in your life, typically from your early 30s to mid-60s, from when you buy your first property and start a family until you retire.
“From an advisory perspective”, Troskie says, “life cover is not supposed to be something you keep for life. That’s not its purpose. Technically, you don’t need life insurance when you’re young, because if you die you don’t have dependants or debt. And then, as you build your asset base through investments, your life cover should, in theory, be reduced, to the point where you just need some cover to pay immediate expenses on death. Good financial planning should put you into that position.”
Troskie says that young people who don’t really need life insurance but want to benefit from the lower premiums accorded to healthier people can buy deferred cover. “For a small premium, you can take out cover for later in life and not need further underwriting. So there are ways to structure it.”
In a recent article on life cover in retirement, Justin Wendover, Certified Financial Planner at Alexforbes, said he often encounters clients who, on reaching retirement, still hold significant life insurance. “As you grow older, the need for life cover typically decreases and, if you have planned correctly, your investments should be adequate to fund your income needs during retirement. If you feel the need to retain cover because, say, you want it to supplement your surviving spouse’s income, it’s important to conduct a proper needs analysis to determine whether the cover is truly necessary or simply a nice-to-have,” Wendover says.
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE
