You need to ensure that you have the correct type of life insurance policy in order to leave a legacy.
In order to make insurance more affordable insurers have introduced age-rated premiums where you receive an initial discount on your life insurance cover with substantial future premium increases. Although affordable in the early years, over time it becomes unaffordable and ultimately a person ends up cancelling the policy – usually around retirement. The argument is that you cancel the policy when you no longer need it (forfeiting the cover), however this is not a good strategy if you plan on leaving a legacy.
According to insurance company BrightRock, a study of age-rated premium patterns found that over a lifetime (insurance companies work on assumptions of 110 years) a policyholder who chooses an age-rated pattern would pay as much as 60% more for the same cover than if they had chosen a level funding pattern.
A level-premium policy more equally divides the payments over the lifetime of the policy – so although you may pay more initially than with an age-rated policy, as you get older you experience lower premium increases.
Schalk Malan, Executive Director of BrightRock says even a level-premium policy can become unaffordable over time. For example, if cover is increasing at 5% annually (to ensure the value of the lump sum keeps up with inflation) then premiums will increase by 8.5% which is well above inflation and will eventually eat further into one’s budget.
Malan says the best type of premium structure for leaving a legacy is a premium settlement option. With this structure, premiums stop at the client’s selected age (between 55 and70) as does cover growth, but the cover stays in place.
This means that your life cover is fully paid by the time you reach the specified age, in effect giving you free cover from that point forward. Although you are no longer paying the premiums, your legacy policy will still pay out to your beneficiaries.
This article first appeared in City Press