CommInsure has entered the debate on the relative merits of stepped versus level premiums, cautioning advisers to consider a number of key points as part of their decision-making.
In a recent article by CommInsure’s Jeffrey Scott within the insurer’s Spotlight Series 2010, Mr Scott highlights four key factors for advisers when determining the suitability of stepped or level premium for their clients:
- How long does the client need cover?
- What will be the cumulative premium cost crossover point (ie where total premiums paid since inception become more expensive for stepped premiums versus level)?
- What effect will indexation have on the premium?
- What is the likelihood of future rate increases?
… a 25-year old client would need to retain their policy until at least age 51
Addressing the issue of the cumulative premium crossover point, Mr Scott cites a policy scenario where a 25-year old client would need to retain their policy until at least age 51 before the cumulative stepped premiums exceeded the level premium option:
“If the client lapses the policy within the first 26 years, stepped premiums would have been more cost effective,” said Mr Scott, who also acknowledged that these numbers change depending on the age of the client at policy commencement.
Mr Scott also cautions over what he refers to as the ‘hidden’ cost of CPI indexation and the potential impact this may have on level premiums. While some insurers apply all annual indexation increases based on the client’s age at commencement, Mr Scott says many products apply CPI indexation increases at the client’s current age next birthday at each renewal date, which can lead to significant cost increases on level premium policies.
This article from CommInsure follows MLC’s announcement in August 2009 that it was changing the default option on its quotation software to level premium (see MLC Steps Up to Level).
“While level premiums are a great way for clients to budget their expenses over the long term, they may not be the most cost effective option over the medium term,” said Mr Scott.
