Level life insurance - where the smart money is

Are you finding that every year your life insurance is getting more and more expensive? After the age of about 35, that’s what tends to happen with life insurance premiums. In fact, at some point they will become unaffordable.

You see, a life insurance premium is calculated by actuaries who consider only one thing – the “numbers”. The numbers tell them that when you are 25 years old, there is a very low probability of you passing away. So when you are 25 years old, the cost of your life insurance reflects this. At the age of 50, the numbers tell them that the probability of you passing away has increased significantly, so they charge accordingly. By the time you are 60, the probability of you passing away is relatively high – you know where this is going. (see http://www.stats.govt.nz/analytical-reports/nz-life-tables-2000-2002/default.htm)

There is one way of avoiding this situation though. If you need your life insurance long term, you can choose a “level premium” option. This simply means that you choose a term when you start the contract - 10 years, 20 years, or even to the age of 80. Your premium is then calculated over the term of the contract and aggregated so that the cost stays the same – no annual increases. You don’t have to commit to the full term that you choose – you can still cancel the contract at any time. But it is a great way of ensuring that your cover is sustainable.

Level premiums are more expensive at the start (normally around double the cost), but in the long term they work out to be far more cost effective. This is particularly evident if you start a level premium when you are young – it’s the smartest way to do it.

Some insurers (see www.inform.co.nz) can guarantee your premium until your 80th birthday. That means that if you are 30, you would know exactly what the cost of your life insurance would be to the age of 80 – and it’s probably not as expensive as you think at this age.

If you want to set your cover up to be sustainable, investigate level premiums. It’s where the smart money is.