Hybrid premiums are an alternative solution to keeping insurance affordable when your clients need cover the most, writes Stephen Rosengren.
One of the benchmarks of quality advice is ensuring your clients are protected when they need it most. That includes helping them choose the right type of premium for their particular circumstances.
There have traditionally been two options when taking out insurance: stepped and level premiums.
Stepped premiums are initially more affordable, but climb steeply as the policyholder ages and can become unaffordable just when clients are most likely to make a claim.
Level premiums stay the same for a set number of years and represent significant long-term savings. They allow your clients to maintain their insurance more easily in later years, but the initial cost can be off-putting.
However, there is a third way to pay for insurance. Hybrid premium structures combine the best of stepped and level premiums.
With blended premiums, your client initially pays an increasing premium rate (similar to stepped premium).
After 10 years, their premium automatically reverts to a fixed premium rate (similar to a level premium) that does not increase and remains so until the client reaches age 60.
Blended premiums offer more affordable initial cover than level premiums but remain cheaper than stepped premiums in the long term.
Lasting the distance
Most of your clients will need financial protection throughout their working lives as their financial commitments grow.
It’s worth reminding clients that the chances of suffering a serious illness increase markedly with age. Ironically, many people end up cancelling policies with stepped premiums when they are most likely to make a claim.
For example, the average age of trauma cancellations among our clients is 45 — and the average age of a trauma claimant is 52.
Clients who cancel their cover would miss out on a lump-sum trauma payment if they later suffer a defined trauma event and could end up being forced to return to work early, potentially jeopardising their recovery.
Conversely, successful claimants can use their lump sum for whatever purpose they see fit, such as replacing income, reducing debts, paying off the mortgage, seeking specialist treatment or funding lifestyle changes such as reduced working hours.
Giving your business a boost
Blended and level premiums may also increase the value of your business. They can help you retain clients who would otherwise lapse and ensure your business grows organically.
Higher retention rates can result in better revenue streams for advisers. Businesses where level premiums account for a significant portion of the book could attract a higher value when sold. The situation could be similar for businesses that have insurances with blended premiums.
Case study: Counting the cost
With stepped premiums your clients could end up paying much more for the same level of cover in the long run, regardless of age or gender.
Take a 35-year-old non-smoking male, who is looking at $250,000 of trauma insurance cover.
Stepped premiums may look like a great deal at first, but they continue to increase year after year — and it’s not long before they become more expensive than level premiums. Over 25 years, your clients could end up paying almost twice as much.
Level premiums are a cost-effective option for the longer term, but the higher premiums early can be a deterrent for many clients.
Blended premiums provide a solution that gives the best of both worlds. In this example, the initial blended premium is more affordable — much like a stepped premium.
Then it switches to a manageable flat premium at age 44, matching the stability of a level premium (blended premiums change to stepped at age 60).
An integral part of the quality financial advice process is a discussion about how long your client can afford to pay for their insurance.
There are scenarios where stepped premiums could be more beneficial (eg, if your clients are looking for insurance to cover a short-term loan).
Level premiums can offer significant savings over the lifetime of the plan for clients who need long-term protection and are able to afford the higher initial costs.
Blended premiums could be the answer for clients looking for affordable initial premiums but still keen to make long-term savings.
- AXA’s level premiums for life insurance revert to stepped at age 70. However, an adviser with input from their client can choose any age before 70 for the level premiums to revert to stepped. For other life companies this is dependent on their product rules. CPI and premium rate increases may increase a client’s level premium.
- Premiums calculated using AXA’s Premium Quoting Tool. The premiums are not guaranteed and may vary in the future due to rate, CPI and policy fee increases. Assumptions: Premiums have been calculated for a male, non-smoker, age 35, occupation rating A, with $250,000 sum insured trauma insurance with policy fee. CPI has not been included.
Stephen Rosengren is head of individual insurance at AXA.