Why premiums rise as you age – and what to do about it
Life insurance can be frustrating. You pay your premiums for years even though you hopefully won’t need insurance for a long while, and when it does pay out, you’re not around to see the benefit. Worse, most life insurance premiums increase sharply as you age, which eventually makes it unaffordable for most people. So, after paying premiums for decades, you’re forced to cancel your policy before it pays out. So, why bother with it?
Life insurance basics
A life insurance policy provides a lump-sum payment to your family or other beneficiaries in the event of your passing. This type of policy is often taken out for peace of mind during a particular life stage. Parents of dependent children get life insurance to make sure their family isn’t left destitute when they pass away; couples with large home loans make sure the mortgage is covered; people with high living costs want to make sure their spouses are comfortable on one income.
In the past, the stages associated with life insurance came early – by the time people were ready for retirement, they no longer needed it. These days, as more people wait to have children and buy homes, and as the cost of living rises, life insurance is needed for much longer. Many people in their 60s are still paying off mortgages and supporting children, which means they still need a life insurance policy.
The problem is, life insurance premiums rise with the age of the policy holder. When you first take out a policy in your 30s, the premium is likely to be affordable – depending on your health and other factors. But by the time you’re in your 50s or 60s, it will have risen significantly and may no longer be worth your while. Putting it bluntly, this is because your risk of death rises as you age. The older you are, the more risk your insurer is taking on, and your premiums reflect that.
Ways to cope with rising premiums
Rising life insurance premiums are a frustrating fact of life, but that doesn’t mean you’re at the mercy of your insurer. There are a few options when it comes to choosing – or not choosing – cover.
Premiums set differently
Traditional rising-premium life insurance isn’t the only type, although it is the most common. Some specialist insurers also offer ‘level term’ life insurance, which guarantees a set premium for a predetermined number of years. In the beginning, your premiums will be high in comparison with traditional life insurance, but because they stay the same for decades, the average paid over your life is lower, and you won’t be hit with steep increases as you age.
Decreasing cover as you age
Some people choose to deal with rising premiums by decreasing their level of cover to make premiums more affordable. This may also make sense as your needs change – you may have a smaller mortgage or fewer costs to meet. Unfortunately, this only works up to a point – if you keep decreasing your cover to keep premiums down, your pay-out will eventually be so small that it’s not worth your while.
Cancelling cover
When premiums rise past a certain point, many people choose to cancel their life insurance policy. If you no longer have dependents living at home or a mortgage to pay, this is often the best option.
Other insurance options
Life insurance isn’t the only way to protect your loved ones. As you age, other types of insurance may be more appropriate. If you’re concerned about costs after you die, a specific funeral cover could be a good option. This type of insurance usually has a low premium and a quick pay-out to help your family meet funeral costs.
If you’re worried about a long-term illness or unexpected accident decimating your savings at the end of your life, trauma cover or serious illness insurance could provide a lump sum to help you and your family survive. You may also be able to take out an insurance policy to cover your mortgage in the event of your death or disability.
Insure or invest
Of course, one way to avoid rising premiums is to avoid life insurance in the first place. Instead of buying insurance cover, some people choose to invest the money they would have spent on premiums, hoping that it will earn enough interest over time to help provide for their families after they die. Although you’re less likely to end up with a huge pay-out using this approach, it does avoid the problem of rising costs – and you can access the money whenever you need it.
Life insurance made easy
Balancing the costs, risks, and benefits of life insurance can be complicated. Whether you’re just thinking about taking out a policy, or you’re dealing with rising premiums already, it’s a good idea to get advice from an expert. An insurance adviser will be able to break down your costs and benefits over time and help you choose the right policy or policies for you and your family.
Want to find out more about life insurance? Talk to the experts at Global Finance. Call us on 09 255 5500