May 28, 2013
Should your advice practice be writing a higher proportion of level premium life insurance business?
- Yes - we need to write more level/hybrid premium (61%)
- No - we have the balance right between stepped and level (36%)
- Not sure (3%)
Our latest poll looks at one aspect of the current ‘sustainability’ debate, as we consider whether stepped premiums may be having an adverse impact on the long-term sustainability of the industry.
The immense value of stepped premiums lies in the ability for the client to commence a life insurance policy at a more affordable premium level, based on their risk factor at the time of policy commencement. Each policy anniversary then heralds an age-based premium increase.
The value of level premium policies relates to the greater prospect of the client retaining the policy for a longer period. If they are able to fund a higher premium level at commencement, they will never be subject to annual age-based premium increases.
That is the simple trade-off: greater initial affordability for stepped premium policies versus greater long-term affordability for level and/or hybrid premium policies.
This issue is being highlighted at the moment because it forms one part of the larger debate about whether Australia’s life insurance industry can remain viable under its current structure.
… affordability is a significant factor contributing to the increasing lapse rates the industry is currently experiencing
Stepped premium remains the dominant choice in the Australian market place. But how many more clients would retain their cover into their fifties and beyond, when their annual stepped premium increases reach significant levels, if they had been prepared to bite the bullet in their earlier years and opt for level premiums?
Life company research tells us that affordability is a significant factor contributing to the increasing lapse rates the industry is currently experiencing. The irony seems to be that the relative affordability of stepped premiums is a positive factor at the commencement of the life of the policy. But as time passes and premiums increase each year, the affordability factor becomes a liability.
The longer a policy stays on the life company’s books, the more robust, viable and profitable becomes that book of business. With lapse rates increasing, due in no small part to the issue of affordability, this places upwards pressure on prices, which can then lead to issues of longer term sustainability.
There is a place for both stepped and level premium life insurance policies in the Australian market. They offer clients a clear choice. The right choice is determined by what is in the best interests of the client. Our poll question is asking whether the balance between the two options is right in your practice. Let us know what you think…