Life policy premium puzzle may see you paying more

A life policy with a low premium may be affordable now, but you may face hefty premium increases when you want to renew the policy or once the guarantee period has expired. Laura du Preez reports

Before you buy a life assurance risk policy simply because it offers the lowest premium, be sure you understand just how the policy is priced and what premium increases you may face later on.

A life risk policy pays out on death, disability or dread disease.

Steep premium increases during the term of the policy, when a guarantee period ends or if you renew the contract can make a policy that looks competitive now unaffordable some 10 or more years later.

At that stage, new risk cover may be very expensive or your health may have deteriorated, making you uninsurable or subject to a premium loading or an exclusion from certain benefits.

Life companies have different premium patterns in a bid to ensure there is a policy to suit every pocket. Although this may help those who could otherwise not afford life cover, it also has nasty surprises for those who are unaware of how the premium patterns play out.

Recently, for example, a man who took out a life policy with Sage Life in 2001 for more than R8 million was faced with a premium increase of 52 percent when the 10-year premium guarantee expired.

Mr A, who was 58 when he took out the policy, is now 68.

The R8-million cover had escalated to R12.8 million, and the premiums to R25 446 a month, before the premium guarantee expired.

Under the guarantee, the premiums escalated at 10 percent a year, and the cover at five percent.

Momentum, which had taken over the policy from Sage, reviewed Mr A’s premiums at the end of the guarantee period and said he would have to pay R38 709 a month for cover of R13.4 million (five percent more than in the previous year).

Alternatively, Momentum offered Mr A the option to reduce his cover to R9.8 million and pay an increase of 10 percent, or R27 629 a month.

Mr A was so annoyed that he cancelled the policy, despite losing on the investment portion of the policy as a result of a surrender penalty.

Mr A was able to renegotiate an existing Altrisk policy on better terms to replace some of the cover he had on the Sage policy.

Philip du Preez, Momentum Retail’s head of insurance products, says Mr A’s policy was not priced for life; the premiums were set for the 10-year guarantee period and were to be reviewed based on his age at the end of that period.

Only 38 percentage points of the premium increase Mr A faced were a result of the review at the end of the 10-year period. The other 14 percentage points of the increase were a result of the compulsory annual increase and to accommodate the increase in cover, Du Preez says.

The best way to determine if an increase is fair is to compare the difference between the premium the person would pay at the date of inception of the contract and the premium he or she would pay at the end of the guarantee, he says.

If Mr A took out a new policy now at the age of 68, his premium would be more than double, so the 38-percent increase offered to him to maintain the cover “is not excessive”, Du Preez says.

Mr A says that when he took out the cover, the life assurer never disclosed to him that the premium could escalate so steeply.

He would not have taken out the