Did you know there are two different ways of setting 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 worth learning more and considering your options.
What is a Yearly Renewable Term (YRT)?
Also called a Stepped Premium, this is the most common set up, and represents over 90 % 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.
Banks and other online insurance providers will often draw clients in with a great offer, such as 20% off premiums for a set period of time. If you are looking at getting a policy with a stepped premium it is highly likely that after that period of time is over the premiums will rise very quickly. And it isn’t advisable to chop and change policies every few years.
What is a Level Term?
With a level term policy you have the same type and level of cover as a YRT policy, just the way in which you pay your premiums differs.
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 that premium for the fixed term – however you are not locked into that policy, though breaking it loses you 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.
So how does a YRT policy compare with Level Term policy?
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.
While in the past it may have made sense to reduce your cover as you got older and life circumstances changed, these days we are having children later – and they are living at home for longer – and with the increase in house prices we 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 broker who knows 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, it is worth considering having 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 more or less cover may be needed. This is an area where having a broker 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 brokers today.
Here are a few reviews from some of our existing clients around New Zealand