The affordability of life insurance premiums is a topic I discuss regularly with my clients. Other concern include increasing monthly premiums due to age. The affordability of products such as Medical Insurance and Income Protection and the “value” that each product brings to an individual a family or an organization.
First of all, there are some facts that need to be understood:
- Calculation of insurance premiums are based on the chance of an event occurring. Strictly speaking the chance of a 65-year-old dying before a 25-year-old is much more significant. Therefore a 65-year-old will generally pay more for their Life Insurance.
- Individual consideration is given to age, gender, occupation, smoking status and past times. These are the broad categories that are taken into account when rating a risk.
- All insurance companies use similar statistics. Although there is a variation between insurers as to how they apply those statistics. They all follow a very similar pattern when striking a premium.
- Insurance companies can use loadings (increased premiums) to negate individual risks. For example, if you suffered from a condition such as diabetes. The insurer may take on the risk but impose a larger premium to allow them to offer cover.
- The risk is assessed when you apply for your insurance by completing an application form. The insurer can not revisit the application to reassess your application in the future. Fire and General Insurance (house, contents, car) on the other hand requires annual declarations. The declaration notes any change of material facts such as previous loss or driving status.
When assessing your own affordability, it is important perhaps to take out such emotive thoughts such as:
- I’ve never claimed on my medical insurance therefore there is not much chance I will need it in the future.
- My family is healthy and I am healthy so those events will not happen to me.
- The events of death, disability or sickness will not have a financial impact on me.
- Be careful of a third persons agenda “including insurance advisers”. Family members can overstate the assistance that will be provided when an event occurs. Your accountant can be focused on outgoings instead of the real reason you are paying insurance premiums. Remember that you and your family will have to bear the cost of not having the correct insurance in place not the third person.
But do include:
- Full understanding of your insurance, including each individual cover and how not having that cover will impact on you when the event occurs.
- The reasons you took out the cover in the first place and if those reasons still remain.
- Attempt to emotionally place yourself in the position of the event occurring. Imagine the financial and emotional consequences of that event.
- Your advisor should understand and have empathy for your situation. Equally important understand insurance and help you come to a balanced and well-rounded decision, tailored made for you and your family.