With the low interest rates currently available, you may find yourself with a little something extra in your budget. To get the most out of it, this could be the perfect time to consider getting a level term cover policy for your life insurance.
There are two ways you can set up your life insurance cover. While the cover you receive is the same, the way the payments are set up – and how much you pay over the long term – can differ. It is definitely worth learning more and considering your options.
Also called a Stepped Premium, this is the most common set up, and represents the vast majority of all life insurance policies. The premiums increase every year, due to both inflation and as the policy holder becomes more of a risk to the insurer. Of course, your sum insured will also increase each year, protecting it from inflation.
The advantage having a YRT is that upfront, when you first get the policy, you are paying the cheapest premiums. As many people first get life insurance along with a mortgage or a child, price is an important factor. The downside is that it just keeps going up, which can lead to people reducing or abandoning their policy – and then not having cover when they need it the most.
With a level term policy, you have the same type and level of cover as a YRT policy, however the way you pay your premiums is different.
The premiums are locked in, and you pay the same monthly premium for the term of the cover.
The insurer is committed to providing you with the policy for the same premium for the fixed term. This doesn’t mean you are locked into that policy, however if you break it you will lose the cost saving advantages of the level term.
Level term policies generally don’t have the inflation increase options that YRT policies do (although some offer fixed indexation, generally 2% per year). Considering a level term policy means being open to taking a long term financial view.
With a fixed term policy your very first premium will be roughly double what you would be paying for your first premium on a YRT policy. However, as the infographic below shows, over the term of the policy you are looking at saving a significant amount of money.
In the past it may have made sense to reduce cover as you got older and life circumstances changed. However, many people are having children later, those children are living at home longer, and with the increase in house prices people are paying off mortgages for longer. And it isn’t just life cover – trauma cover is often tied in with life cover and with constant medical advances we are surviving medical trauma that we may not have previously, meaning we’ll be wanting that cover for longer.
Most insurers offer level term option alongside the YRT option but some may have exceptions in the fine print as to when they may raise the premium, which is just another reason it is always worth talking to your adviser as they know all the ins and outs of the different policies.
If the concept of a level term appeals but you are not sure about having all your cover locked in at the same level for an extended term, you can have a bit of both in the same policy. Setting a baseline of level cover, and then the rest as YRT gives you flexibility when circumstances change and you may wish to change your level of cover. This is an area where having an adviser to talk to can make a big difference to having the policy and cover that is right for you.
If you think a Level Term policy might be right for you, or just want to know more about how it all works get in touch with one of our advisers today.
Here are a few reviews from some of our existing clients around New Zealand