This is alarming given that non-insurance-based factors may result in a level premium recommendation transpiring to be very poor advice – something I have experienced first-hand.
Several years ago I was working as an aspiring paraplanner and sought to obtain some long-term cover.
I met with an adviser and was recommended a comprehensive solution, funded with ‘level’ premiums to take advantage of my age at application date.
This was poorly-considered advice as no thought had been given to the foreseeable future where I would likely progress to an adviser and obtain a better occupation code.
I decided on a ‘stepped’ premium variation and two years later, re-wrote the cover with a level premium under a superior occupational category. This decision will save me tens of thousands of dollars over the life of the policy (not to mention the one-thousand dollar saving each year whilst I was a cash-poor paraplanner).
Level premium recommendations are often based on advisers seeking to ‘lock away’ the best insurance terms available today.
As clients’ premiums increase with age, locking away insurance terms for a 35-year-old may insulate them against significant premium hikes throughout their 40s and beyond. This approach is very straightforward, but more thought is required.
When recommending level insurance premiums advisers must also consider if the insurance terms recommended will remain the best option in the foreseeable future.
It may be over 10 years before your client gets any tangible benefit from your ‘level’ premium recommendation and a wide range of both predictable and unpredictable events can occur over this time.
Before you recommend any level premium, consider the following:
• Career progression: Is your client likely to be in a considerably better occupational code in the coming years? This becomes a key question for aspiring professionals, as mentioned earlier, but give thought to other scenarios such as tradesmen with successful and growing businesses.
Are they still going to be ‘on the tools’ in 5-10 years, or running the business from their home office, with incidental hands-on work? It’s also important to know if your client is considering a career change in the future: not just in the next 12 months but over the next 5-plus years.
• Anticipated windfalls: Are there any one-off funds likely to be received in the future? A client with ill or elderly parents may be receiving a significant benefit at some point in the future; naturally this type of windfall is highly unpredictable but it is reasonable for you to take a long-term view.
Given that paying stepped premiums for 10-15 years may still work out cheaper than paying level premiums over the same timeframe, a stepped approach may be optimal if any windfall would be expected to eliminate the need for your recommended cover.
• Future plans for your client: Taking a 10-15-year approach, some clients may have the surplus income to clear all their debts beforehand – and perhaps the debts that you were seeking to cover with your level premium insurance recommendation.
Will the clients continue to grow their wealth through borrowing (for instance via investment properties or business debt) or will all debt be cleared to pave the way for a long-term savings strategy?
Lastly, consider the utility of money which is used to fund a higher (level) insurance premium over the long term. The graph below represents a ‘stepped’ vs ‘level’ comparison for a 45-year-old professional:
The ‘crossover point’ occurs in year 8, and the decision to take out a ‘level’ premium achieves a net benefit in Yr 14.
But what if short-term savings achieved by using stepped premiums were invested with compound interest? Assuming a 6 per cent return, this would equate to over $35,000, kicking the true ‘crossover point’ much further down the path.
If your increased level premium costs resulted in the client being unable to clear long-term personal loan or credit card debt, this recommendation may significantly disadvantage them financially.
As with many aspects of financial advice, these decisions require the adviser to ask the right questions and show a good deal of financial leadership.
Career progression can’t be forecast with certainty, nor can your clients’ future financial intentions, but after detailed assessment, ‘the balance of probabilities’ should be considered.
Level premiums often have their place in a comprehensive insurance solution but recommending the right premium structure needs thorough consultation with clients and more thought around the foreseeable future.
James O’Reilly is the co-founder of Verse Wealth
Level Premiums are for suckers. Ever since OnePath increased it’s leveled premiums in mid 2018 – I’ve lost faith in the structure. There is no guarantee from any insurer that leveled premiums will stay ‘leveled’. It’s the classic case of: pay us the money now and we promise you in the future.
Agreed, IP is very important. I would advocate taking both IP and a full insurance package where possible. Re: truely level, this exists with a few providers, 3 that I know of where CPI increases are charged at the same age rate as the original cover. A lot of providers charge the CPI increase at the client’s new age thereby giving a compounding creep on the premiums even on level. This is still better than stepped, but there’s a huge difference over time. I guess it’s why research engines are useful but don’t actually remove the need for us to do our research.
Rob, very much agree. However I still value IP as most important to include. making this level is not nearly as expensive as lump sum coverswhere they often are 50% more. Ip tends to be around the 25 to 30% more.
Its common to hear from our clients they had wished they had done it sooner. Not common to hear regrets ever that they had done level. They have really made a comitment to have insurance until age 65.
Rob, i agree. Good thoughts. However i have not seen a level premium policy that you say is “truely level” and you alude to the fact that the CPI increases are based on the original inception date? Ive not seen this offered. All CPI increases are calculated on date of acceptance of each offer and remain level from that date
The stepped premium can be changed to level regardless of health. there is no underwriting as it is not seen as increasing the risk to the insurer.
Just a point i could add here Lawrence. You can change from stepped to level without underwriting. So you do not need to be stuck with stepped premiums. You cant go from level to stepped tho. Otherwise I agree.
Laurence, above i have provided some insurers. I see it most vital with smokers than occupation ratings but the later being just as important.
Graham, good words. I am totally surprised also with this page. The ability is offered from most insurers to change the occupation etc and maintain the entry age for the level premium and each CPI. What he didnt raise which is of more value and prevalent, is that of the smoker quiting. You need to ensure you place smokers with companies that use the commencement date to re-rate. A 40 yold smoker quiting at age 50 on level premiums would find that; to go back to non smoking would be more expensive for a few insurers and would retain cheaper cover then as a smoker.. The likes of AMP, OnePath, MLC etc use the earlier date. I wont mention the ones that dont here. Its seems our author needs training and better understanding to operate in the risk market. If the cover is to fund debt and an inheritance is recieved, then really, does it matter? I havent heard of a spouse complaining we over paid them or that they are now concerned they have too much? Could they then provide better for family members? estate planning?
If it is level, then the ongoing costs later in life would be a bargain. Also I find that the breakeven point is about 6 years and not 8.
The other item we often can over look is the earning potential. What earning’s potential, “buy term and invest the rest” comes to mind and should answer the question.
Another example, man age 57. stepped vs level, non indexed? shows he saves just 3000$ by age 65. I raised the issue of the costs being higher upfront and missed earning potential with him. You do that to ensure you counter objections before they are raised. Then your not required to be put on the defensive. . Client said ill take that, he didnt care that a mere saving of $3,000 was hardly worth it. He just looked at the costs at age 62,63 and 64 and said i won’t be insured at that age, i’ll cancel it watching it climb so fast. Level premium gave him greater certainty. Level premium gives him a personal commitment to be insured until age 65 at least.
There are man reasons for level premium and arguements against it have often a hardly credible reasoning
Some very good comments. I have not made the assumption that every insurance policy is reviewed annually as most are not (consider cover written through banking channels, etc). If you are reviewing your clients’ cover at each renewal stage then you can naturally seek to amend the occupation categories – hopefully the insurer doesn’t ‘re-rate’ the level premium accordingly.
Funds saved via reduced premiums are ‘invested’ for most financially-guided Australians in that surplus cashflow typically filters into debt reduction, in turn eliminating interest repayments. Residential mortgages are now 4-5%pa but this is rare with 6-8% probably more reasonable over the long-term.
Great point Laurence re: downside-risk and the reason I highlighted the importance of consultation with clients. These risks must be communicated to clients and I’m sure we would all hope that advisers are having a detailed ‘stepped vs level’ conversation with their clients.
Good comments everyone; to clarify I am not making the assumption that clients’ insurance policies are being reviewed each year as most are not (consider banking channels, etc). Hopefully you have embedded this into your practice and can naturally re-rate with the same provider.
Funds saved with reduced insurance premiums are generally ‘invested’ in the sense that many Australians seeking insurance have debt, which is ultimately the avenue for all unspent funds. Residential mortgages are at 4-5% now but they certainly weren’t at any other point in our generation so talking about non-deductible 6-8% amounts is fairly reasonable.
Great comment Laurence re: downside risk and the reason I emphasise ‘thorough consultation with clients’ – these risks must also be communicated. This area was touched on very lightly in seeking to keep the article short and sharp.
A thought provoking article, but flawed in its premise. I’m a relative newcomer to the industry but in my 10 years I’ve never once had a client come to me and tell me that they’ve paid down thier debts and are ready to cancel their covers. I’ve also never once had a client come to me and tell me that they’ve invested the savings on their premiums. They don’t invest the savings sorry, they bemoan the spending in the first place. Therefore basing an argument for or against Level premiums on the savings either up front or even over time is flawed because it’s not how clients work or react with Life Insurance. On the same note, I’ve had literally thousands call and complain about the increased cost of their protection and lots cancel because they can no longer afford the cover.
For me, the argument for Level Premium is an indivitual consideration based on affordability. I’ve sold Trauma on Level Premiums to 50+ year olds with stepped premium IP or even no IP because they’re concerned about being forced into an early retirement by a serious illness. They’re working for retirement savings, not to pay debt or raise children anymore. If we can build them an affordable structure now and then maintain it at an affordable level, then they can afford to keep the protection when they actually need it most. At that point, they don’t get excited about their savings, they’re grateful that they can afford to keep the cover. Most that I’ve done this with, wish they’d done it 10 years prior so they could afford to keep the IP too.
Level premiums don’t provide savings as such because clients don’t continue to keep cover that’s too expensive. They reduce the cover and then eventually cancel it, often before they actually needed it. Level premiums provide long-term affordabiltiy of premiums. If this is even likely to be a useful requirement for the client, then Level Premiums should be considered for at least a part of thier advice. If they are never likely to need long term affordability of premiums then they don’t need level and stepped will suffice. Neither of these situations diminishes the need to review cover and upgrade benefits and/or job categories etc. as the client’s circumstances change, this is still important and reviewing yearly and helping a client fully manage their financial affairs won’t in itself remove their need for protection, although it may mitigate it somewhat. And most importantly, their cover level requirements has the smallest impact on their premiums. Thier age, occupation, past times, health,sex and just about everything else has a bigger impact on their premium cost.
Ultiamtely experience shows that they still need quite a reasonable amount of thier protection most of their working lives. Therefore, as the article says, consider the “balance of probabilities” and accept that most of our clients will need some protection for quite some years.
The other part that I believe is really important and missing in the above article is that it’s important when conisidering a level premium that the premium is actually Level as most actually aren’t. A level premium that re-rates CPI increases in cover levels at a client’s increased age is only marginally better than a stepped premium, especially in larger cover levels and for younger clients who will hold their cover for longer. Choose a Level premium that is actually level. Choose a policy that provides high quality benefits and review often. Help upgrade your clients whenever you can and accept that the risk of stepped premiums is that the client still needs cover and eventually can’t afford it but the alternate risk with Level premium is they can still afford to keep more cover than they need. In neiter of these cases will they be excited about paying the premiums and that’s just the nature of the beast. At least they can choose to reduce their level cover when they don’t need so much. I bet they’re far more grateful to their Financial Planner for the latter problem than the former problem.
So my view is fix the bit you can fix, reducing cover doesn’t fix premiums too well and you can’t make a client healthier or younger. You can insure them well when they’re younger and you can help them choose a better quality protection with at least a good base amount of protection on Level Prmeiums and you can help them to review the cover and keep it relevant as part of their total financial wellbeing.
Graeme – could you please kindly let me know which insurer’s maintain the level premium from the age of inception when re-rating an occupation?
This is obviously what should happen but I have never dealt with an insurer that takes this approach. They have all argued that it is a material change in the risk (even though it is for the better) and so the review results in the level premium resetting.
Thanks in advance.
This guy is either naive, or obviously doesn’t realise that when you change your occupation with a level or stepped premium, the insurer will re rate you to a better occupation and lower your premiums, whilst still maintaining the current age level premium.
Also, I’d be surprised if the client actually did invest the difference and if so, maintain it for a long time – We all know those of 20+ experience, that the client won’t stick to this – They will always do it ‘next month’.
You are right in saying that it does depend upon product to an extent. Although this would not be the case in the example I had in mind when writing the comment. The example I was thinking of related to a client that was able to claim a partial payment on their trauma policy. They were also able to claim on their income protection cover. They made a full recovery and returned to work. If they had been on a stepped premium they would have been stuck with it for life.
I like the utility argument $1,000 into a mortgage of $400,000 may have greater impact than the extra $1,000 put into a policy which is unlikely to be kept for the long-term.
Laurence : Many products pay out – say TPD – and so no ongoing premiums to consider, and others pay your premiums while on claim (the IP product we use). So potentially depending on the product selected you would not be out of pocket moving forward as there are no further premiums to continue to pay. Need to know your product, but see your point if the wrong product selected.
And post claim the buy back can be limited if a person has even selected that as an option. Perhaps the extra cost where it is applicable (which pre injury they were willing to take on) is offset by a capital injection for some people?
I’m thinking of a client last year (cancer) who claimed $150,000 Trauma and we did have buy-back so he recently signed to replace the cover (no cancer any more) at no extra cost (loading) and yes the premiums are stepped so they will rise over time, but then again with $150,000 off his mortgage he leaped ahead financially and now he will NEVER be without insurance regardless of the cost. Whereas every year before he understood the importance of a claim he moaned and groaned – can’t imagine ever having got him to agree to level.
Several changes of pay and career over his last 15 yrs so do agree with the probs of assuming a policy will live forever, although our business primarily adds on to what is there – almost never replace – so could do a base of Level and Step as their income rises.
Some interesting points to consider. Most insurers do reset the level premium at the time you apply to have your occupation rating reviewed (even if the material change represents a reduction in the risk) and so the clients can potentially ”lose out” in this situation.
However, on the whole I tend to disagree with the approach you have suggested. Writing insurance based on anticipated changes is dangerous.
Take your situation – it is great that you managed to save yourself a few dollars over a two year period, although you did not actually save tens of thousands of dollars as you have stated. All you really saved was the difference between the stepped and a level premium over this two year period. However, the downside risk you ran during this time was most definitely in the tens of thousands of dollars – if not in the hundreds of thousands of dollars. If you had suffered a health event or injury during this time you would have been stuck with a stepped premium for life.
I would be very cautious in advocating an approach that leaves a client with this kind of exposure. If a client were to suffer a health event or injury in any of the scenarios above (and we’re talking about a 10-15 year period which will undoubtedly include some of the most high risk years), I can almost guarantee that they’ll be wanting to hold the cover for longer than originally planned – and by that time it will be too late.
A good article covering some very good points, it reminds me of the days many many years ago when Tern insurance actually came into vogue, the catch cry was Buy term and Invest the rest! But in reallity human nature being what it is very few people had the discipline to invest the rest it was spent
Well James I like some of what you say but, I have seen 35 years in this industry, Level is not worth the paper it is written on, same as Zurich’s agreed IP. Level premiums, commissions and the like all have no place in this industry. A 25 year old woman is very different to a 35 year old woman, definitions for example, babies, family history, and then new products, Well new definitions with another provider, the industry or Trowbridge (an educated derelict) call this CHURNING huh, yes but better still is the Government forgetting it cant price fix its against the LAW, oh humm well restrict trade for a better word thats it restrict trade and competition that what the current investigation into the RISK industry Is, profit trade restriction and corporate manipulation all designed by people with a financial interest.
You could still apply for Level premiums (at the younger age) & then upgrade with the same insurer to the more suitable occupation rating & still save as over the longer term as the entry age was lower at the start date.
James, my financial planning practice reviews ALL clients on a annual basis. Change of Occupation is one of our primary questions. A favourable change in occupation rating has resulted in premium reductions by lodging a “Change of Occupation” request to the insurer, particularly for Income Protection and therefore I do not see Career Progression a issue; Unless the client is not having their insurances reviewed? .
Policy Terms, ensure you consider as part of your recommendation that the insurer’s policy has automatic upgrades added to their policy.
Utility of Money, taking out level premiums is a risk free investment. You need to consider the investment risk, can you guarantee the return on investment to offset the difference in the cost of premiums.
A client’s budget is taken into account when providing advice and as such, affordability forms part of any advice.
Agreed. But that means the argument of the vociferous becomes dubious…..
You could have applied for an occupation rating review with your original provider which does not require any re-writing of cover (including full underwriting). If your occupation rating was to improve, your premiums would also reduce irrelevant of a stepped or level premium …
Misleading article to not indicate that you can have your occupation rating reviewed and improved with your existing provider.