Rate for Age (RFA) or Level Premium structure? That is one of the key questions to consider when opting for a term life product.

If you are looking for certainty of premium affordability, does an RFA or Level Premium structure really make that much difference?

The short answer is yes, it does. The premium structure recommended by an adviser will have a direct influence on your ability to afford the cover both in the short and long terms and the ability to purchase other insurance products relevant at the time.

Over the past few years, trends show that Level Premium structures have experienced something of resurgence.

This structure has been tacitly, if not overtly, endorsed and promoted by all of the Life Insurance companies and has effectively created two schools of thought as to the relative benefits of each premium structure. Is there room for some middle ground?

Common sense dictates that the answer is neither one, to the exclusion of the other. Each has its own benefits and advantages, so here are some points to consider when considering a term life Cover.

1. AT THE POINT OF PURCHASE
In an extremely competitive market, where premium affordability is one of the main considerations, RFA most times depending on age, will always be at a lower premium and you get the Life Cover you require and probably would meet your expectation of a market competitive rate.

2. IS IT GUARANTEED?
However RFA premiums are usually guaranteed for 12 months and would increase on the next policy anniversary date. Hence there are level premium options worth considering for various periods e.g. 10 years/to Age 65/to Age 80 etc. However not all Level Premiums are created equal. If you are considering a Level Premium structure, make sure there is an underlying premium guarantee in the policy wordings, backed up by an assurance that it will not be compromised by the proposed new life tax changes, which will come in effect in July 2010, and will likely result in an increase in premiums on all new life policies after that date. Anything less than this guarantee effectively negates the objective of premium certainty. Furthermore, while mortality rates are generally improving in some age brands, unaffordable premiums during older years results in forced decisions for either decreasing the Life Cover amounts assured or in cancellations of Life Cover policies. A premium guarantee is, therefore, non-negotiable.

3. ARE YOU GETTING VALUE FOR MONEY?
It is fair as a client to consider the best value for your money. In the respect, the purchase of an insurance product is no different from the purchase of other commodities. It is therefore prudent at the time of opting for Level premium structure to check also the affordability of the total Life cover sum assured. Given that a Level Premium for a set amount assured is approximately twice the price of an RFA premium at point of purchase and you can achieve/receive double the amount of cover with an RFA premium.

4. CONSIDER SPREADING YOUR DOLLARS TO COVER RISK OTHER THAN LIFE ONLY
Financial planners often talk about risk strategies and diversification of investment portfolios when looking to minimise the level of risk to their clients. Similarly, for a client opting for an RFA premium structure as opposed to Level Premium can leave some ‘dollars on the table’ to be utilised elsewhere. Clients can the use this ‘extra’ premium for other insurance purchases, such as health cover or disability income protection. Experienced advisers will tell you that they never hear complaints from clients who received too much at claim time or were able to lodge multiple benefit claims.

5. THE BEST OF BOTH
Rather than opting simply for an RFA or Level Premium structure, there’s a compelling argument for a combination of two. In all likelihood you may have a home loan with a combination of fixed and floating rate components. In that scenario, the bulk of the home loan that will not be repaid in the short term is fixed while the remainder is floating and able to be easily manipulated as circumstances demand.
Similarly, there may be an underlying amount of debt or requirement for term life cover that will suit a Level Premium structure while the balance may be more suited to an RFA structure where you can pay for the cover that is affordable today.

6. POLICY ANNIVERSARY
Even though the RFA premium is affordable at the point of purchase of a Life Cover and meets with your expectations of market competitive rate there will certainly come a point in time when you will start to query increasing RFA premiums, especially as you are getting older. The increase in premiums in certain age bands increase significantly on policy anniversary renewal dates. This is the point at which you may want to consider the Level Premium concept, especially as this can be accomplished without further medical underwriting (as long as the sum assured has not increased). This Level premium structure option will help achieve greater premium certainty.

As with most things in life, there is no right or wrong answer to this debate. However, there is a more persuasive argument for effective use of both RFA and Level Premium structures to achieve affordability with advancing age and help meet your changing risk requirement in your journey through life.

The above information has been provided to serve only as a guideline to assist in evaluating your insurance needs. You are encouraged to do your own research before arriving at any decisions.

 

For further information, please contact:
Oliver Pereira – OPM Insurance Services Ltd.
Ph. 0800 66 77 92  Faxmail. 021 551 669 Mobile. 021 66 77 92
Email. oliver.pereira@xtra.co.nz