Level Term Insurance - what is it?
Friday, 23 April 2010
Imagine you could choose to fix the price you pay for petrol at $2.00 a litre for the next 30 years.1
It would cost you a bit more at the beginning, but eventually you should be paying less than the market rate. Sounds like
a good idea, doesn’t it?
Well, you can choose to do something similar with your Yearly Renewable Term Insurance. Depending on your age and cover that you have in place, switching some or all of your insurance to a Level Term policy where premiums are fixed may help make your long-term financial planning more predictable.
For example, Kelly1 (24) and Steven1 (27) took out a Life policy and their insurance adviser encouraged them to purchase $250,000 level term cover, for $22.20 per month even though it was more expensive at first than an equivalent yearly renewable term policy.
As they got older they bought some more term insurance cover as they accumulated more debt in the form of a new car. When Steven reached 50, he was made redundant and he ended up in a job that didn’t pay as well as when he’d taken out the policy 23 years previously.
He was so pleased that he had his life insurance at a level term, as by this time he was still paying just $22.20 a month. If he’d taken out a renewable term policy, by this time, his premiums would be over four times as much and much more that he could afford. He was effectively saving $881.76 a year on his premium.
Terms
Yearly Renewable Term
This is an annual premium structure that starts low and increases yearly. A Yearly Renewable Term premium is suitable if your insurance requirement is for a shorter term, for example, paying off a 10-year mortgage.
Level Term
The premium and cover is fixed for an agreed period of time. Under a Level Term policy you pay more at the start of the policy, and less towards the end (compared to Yearly Renewable Term). Level Term policies are better if your policy is needed for a longer time.
Combined
You can have some cover as level term and the balance as yearly renewable. Talk to your independent adviser about your options. You can choose to move some or all of your cover to a Level Term option, depending upon your situation.
1This information is indicative only, and is a fictional example to illustrate the difference between the types of premium payment. Talk to your independent financial adviser about your options.