Monthly premiums on all types of life insurance come in a variety of forms. From premiums that remain the same throughout the term of the policy to premiums which are set to increase at specific intervals by amounts not pre-determined. In this blog, we’ll discuss the premium types available, explain how they work and when they may be suitable.
When using a broker to set-up your life insurance, the different premium types should be explained and advice given. A broker should ensure you are fully aware of the premium type on your policy. If you’re setting up your own policy, it’s essential that you read the small print to ensure you know what you’re signing up for. Insurance providers can lure you in with a policy that looks cheap, only for you to find out the premiums increase at an alarmingly rate!
Guaranteed Premiums – These are fixed for the full term of the policy. Premiums will remain the same every month for the duration of the policy. For the vast majority of life insurance policies, guaranteed premiums will be the most appropriate and most cost-effective option.
Reviewable Premiums – These, as the name suggests, are subject to change throughout the term of the policy. Premiums are reviewed by the insurance provider at specified intervals, typically every five years. Premiums will be increased subject to medical changes, changes in the insurers risk appetite and due to the simple fact of ageing. Reviewable premiums may initially be cheaper than guaranteed premiums but normally cost significantly more over the term of the policy.
Age-Costed Guaranteed Premiums – An escalating premium, similar to guaranteed premiums but with specified annual increases. The rate of increase is specified from the outset ensuring you are aware of what the premiums will be for the entire policy term. Age-costed guaranteed premiums can be suitable if the priority is to keep initial costs low. However, they normally cost significantly more over the term of the policy.
Age-Costed Reviewable Premiums – An escalating premium, similar to reviewable premiums but with additional annual increases. The anticipated rate of increase is specified from the outset. However, as the premiums are also reviewable, premiums can be increased more than the specified amount. Age-costed reviewable premiums can look very appealing but they are rarely appropriate due to the spiralling cost.
All life insurance policies can be linked to inflation. Apart from policies specifically designed to protect a mortgage debt, linking to inflation is often recommended to ensure the level of cover remains the same in real terms. If this option is selected, the monthly premiums will also increase in line with inflation. A policy linked to inflation is an optional add-on to a policy as opposed to a type of premium. However, it can be easily confused with an age-costed or reviewable premiums policy if you’re not aware the level of cover is also increasing.
Life Insurance is regularly used as an umbrella term for a range of policies including life cover, critical illness and income protection. All three types of cover serve a distinct purpose and together provide “fully comprehensive” insurance. Getting the appropriate policies in place also provides peace of mind that you and your loved ones are financially protected, whatever happens. If you want to review your current policies, check your current premium types, discuss new cover or simply understand more about life insurance in general, we’re here to help with free, professional advice.