HOW TO CHOOSE THE CORRECT POLICY STRUCTURE FOR YOUR NEEDSBy FRANZ SMIT Once you've decided what product and cover will work best for you, one of the next decisions is how to structure your premium patterns and benefit increases. There are a few different ways that one can achieve this - how and when they pay out, and how the premium increases over time. The main consideration is the purpose of the insurance. Insurance is usually taken out for peace of mind to either protect yourself and your family financially, or to protect your business interests. Although there are many different variations, we will be looking at three different options namely: Level premium pattern, age rated premium pattern, and fixed increase premium pattern. Level premium pattern will cost more to begin with, but the premium will only increase if the sum insured increases. This is ideal for long term budgeting and fixing your premium growth over the lifespan of your policy. Age rated premium pattern means that to begin with, your premium will be 20-40% less, but your premium will increase by the specific annual increase for each year you get older as well as a growth on benefit amount. Generally speaking, your age rated premium pattern will "catch up" to your level premium pattern after 7-10 years. After that many people wish they had originally chosen a level pattern… A fixed increase will increase your premium every year with a fixed percentage chosen at initiation stage. This can range from 1-20% per annum. A fixed increase will also generally have a period where it is applicable. Let's use 15 years as an example of what this means in real terms. After 15 years your premium will have a huge leap in premium payable; we have seen increase of over 100% in the past. All of these premium patterns have their place and you can make it work in your favour. Let's look at a few examples. Personal insurance: If you have life cover, disability/loss of licence insurance, and dread disease cover aimed at protecting yourself and your family financially, then a level premium pattern would be your best option. Sure you pay more to begin with, but after a few years it will be the "cheapest" insurance you have ever taken out. Business insurance: If you have partners in a business and you need a buy and sell agreement, the chances are that partners will sell their shares and move on to another business venture. In this case, one would use the age rated premium pattern to save on premium costs. Home loans/ property purchase: When purchasing a home or property and the idea is to repay the loan within 15 years, then the fixed premium pattern increase will work in your favour. You will be able to budget the exact annual cost of the insurance over that period of time. If you would like some advice on which premium pattern would work best for you and the difference in premium costs, don't hesitate to get in contact and I will be happy to assist you. Happy landings, Franz Smit Please note that this article is the opinion and an interpretation of the South African insurance industry by the author, and is not intended to malign any company or individual. Views may differ from other parties such as insurers or brokers. This article is meant as introductory information only and in no way constitutes advice. For tailored financial advice to suit your personal needs, please contact an independent financial advisor. All content is subject to copyright and may not be reproduced in any form without the express written consent of the author. |
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