Don’t make mistake of choosing life insurance cover without fully understanding the difference between fixed and escalating insurance premiums.
Knowing the difference can help you choose cover that best suits your needs. Lee Bromfield, CEO of FNB Life says that when taking out life insurance, you need to make an informed decision based on your circumstances and take into account your short and long-term goals. Bromfield says: “Avoid choosing escalating premiums merely because this is the most popular option offered by providers. Taking the time to do your own research and also understand how fixed premiums work can lead to long-term savings.”
Below are pros and cons of fixed life insurance premiums:
- The premiums are fixed, giving you assurance that you’ll be able to afford payments in the future.
- Fixed premiums give you more control over your budget.
- You benefit from long-term costs savings, as the premiums remain the same even as you age.
- The premium cost breakdown is easy to understand.
- The premiums don’t increase annually and offer protection against rising inflation.
- The premiums are expensive at the beginning, but remain the same for the duration of the policy.
- It can be difficult for young adults who are just starting out in their careers to get this type of premium due to the high costs.
- The policy is not flexible. It doesn’t offer an option to increase or decrease premiums.
- The sum insured remains the same for the duration of the policy.
Escalating insurance premiums
Escalating insurance premiums are initially more affordable, but gradually increase as you get older. When choosing this option, it is worth considering how much the premiums will cost you in the next 10 to 20 years, in order to assess affordability. For example, the premium of a 30-year-old with a 5% premium escalation option will more than triple by the time they are 55, without any commensurate increase in their cover. This often leads to consumers not being able to afford life cover when they need it most.
Being aware of the difference between fixed and escalating life insurance premiums will help you avoid making costly mistakes. Life insurance companies often include a premium escalation as the default option, so it is worth reviewing your policy to check if you already have one.
Source: FNB. Image: Pixabay