Because life insurance is cheaper when you are young, it may seem like a worthwhile purchase. Underlying health conditions are less likely to be an issue, so finding cover may also be easier.
However, if life cover is sold on what is known as a rating-per-age basis, your premium will increase each year. While this may be inexpensive initially, will you be able to afford the long-term increase?
This article considers premium options, what is likely to happen if you let your cover lapse, and the questions you should ask your financial adviser before taking out life cover.
Tip: Home and vehicle insurance are highly recommended, irrespective of your age. Apply here.
The benefits of life cover
Life cover is of great value if you want to ensure your family is taken care of after your death. It can provide financial support to your loved ones, and cover any outstanding debts you may have.
A student loan would be a good example of such debt, notes financial planner Sylvia Walker, author of Smartwoman: How to Gain Financial Independence and Create Wealth - particularly if your parents have signed a suretyship.
“If you take out a student loan for which your parents have signed surety, life insurance prevents them from having to service that debt should you die,” she says.
It is vital, however, that young policyholders understand what they are purchasing, particularly the future costs of it.
Questions to ask your financial adviser
When taking out life cover, it’s useful to ask your financial adviser to explain the different premium pattern options, and how they affect premium escalations over the term of the policy.
“A level premium pattern would mean that your premium will remain the same each year,” says Munaf Mukadam, a financial adviser at Gradidge-Mahura Investments. “With an age-rated premium, there will be compulsory annual escalations that range between 3% and 8%, depending on your age.”
The age-rated option is cheaper than the level pattern initially, but this will change over time, due to annual escalations.
“Paying R237 a month is fine when you’re in your 20s,” Walker says, “but could you afford R1,270 every month once you’re in your 40s?”
If you plan to keep the policy indefinitely, Mukadam notes, a level premium would be the most economical option. However, in the shorter term, age-related premiums are better.
“If you’re taking insurance out for a specific need - for example, until your child becomes financially independent, or until you pay off your bond - and you intend to cancel the insurance once the need no longer exists, an age-rated premium may be more suitable. This is because the lower initial premium will save you money.”
Emile van der Spuy, a financial planner at Liberty Life, says the first thing a financial adviser should explain is that life insurance is always long term.
“You want to make sure you can keep up with inflation. If your premium doesn’t escalate, your cover won’t escalate either. R1 million will be worth significantly less in ten years’ time than it is now,” he says.
Escalation also means you can avoid medical tests, should you want to increase your cover later on.
Van der Spuy says you should be very sure you can afford the escalation, however, particularly once you get to your senior years. An option for older people, Walker says, is to ask their children to pay their premiums on the understanding that when they die the children will reap the financial reward.
Alternatives to life cover
Not everyone needs to take out life cover, especially if they have no dependents, Van der Spuy says.
“Don’t take out cover you don’t actually need. Rather consider insuring against specific events, such as dread disease, disability or retrenchment.”
Funeral cover, for example, will take care of your immediate expenses after your death, Walker says.
“This cover is usually very affordable and has a level premium. Also, think about taking out credit life insurance to cover your bond, so the family home doesn’t need to be sold to cover your debt should you pass away.
“A good way to determine whether you should take out life cover is to ask the questions ‘What am I worth?’ and ‘What would still be owing if I died?’ The aim of life cover is to prevent a financial shortfall in the event of your death.”
Tip: Investing for your future is just as important as taking out life cover. Find out how to start saving for your retirement here.