Cameron Irvine, Financial Adviser/Investment Coordinator at Lifetime, discusses level premiums.
Insurance premiums are not always fun to pay – month after month of money going out for something you either have never used or may never use in the future. Insurance is undoubtedly beneficial but when the cost keeps going up, it becomes harder to justify these monthly premiums. So, what can be done to keep insurance costs down?
This is where level premiums shine. Level premiums mean that you pay the same amount, year after year, so you don’t have to worry about the cost going up. This is a huge advantage for a number of people, but like anything in life, it’s a balancing act. Sometimes it makes t sense, and at other times, it doesn’t.
Level premiums tend to make the most sense if you plan on holding insurance for a long time; in fact, the longer the better. Level premiums means you pay more in the early years of your insurance but significantly less in the later years. If you hold a level insurance policy for long-enough, you will eventually break-even. Break even means you will pay less overall (and be better off) after a certain amount of time. For example, a young 25-year-old can expect to break-even for in their early 50s on a levelled life insurance policy. For trauma insurance, you’ll likely break-even around late 40s. For someone that is 55 years old, they likely won’t break even until mid-60s (around normal retirement age).
Many insurance policies allow you to level your premiums by chunks of time (e.g., 10 years) or to a certain age (e.g., 65). Life insurances often allow for longer level times, possibly up to age 100, while disability and trauma insurances usually end the cover and the premiums around age 65. After this age, you’ll stop paying your level premiums but will no longer be able claim coverage, for example.
One of the best ways to save on your insurance premiums is to lock in level premiums if you can afford it. Over a person’s lifetime, level premiums are almost guaranteed to save money, but it will take a while before getting there. If you can lock in level premiums at a younger age, it’s even better, because then you are paying a much lower rate for your insurance and it’s locked in forever. If you are a parent, or grandparent, this is an excellent way to help secure your loved ones’ future so they don’t get stuck on the premium treadmill for their whole lives.
Like any financial issue in life, you are not alone. There is tonnes of help out there: articles, blogs, brochures from insurance providers, online reviews, and of course, you can always ask a financial professional.