Compound interest is amazing. It’s great for your investments but brutal for your expenses. Think of heavy inflation not for 5 years, but 30. Life insurance premiums are probably one of your expenses most linked to the effects of compound interest. There aren’t many monthly budget items that consistently increase year on year, by 5% or 15%, and that have a term of 5 or 40 years. Compound interest starts off slow and underwhelming but gathers pace.

There are many examples out there of the power of compounding. An applicable one in this context is 15% per annum over 5 years doubles your money. That applies to investments, but it also applies to life insurance premiums. In this example, your R3 000 per month life insurance premium is R6 000 in 5 years, R12 000 in 10, and in 20 years it will be R48 000 per month. The above would be considered an aggressive structure but it provides the context. There are so many clients out there who now have this problem. Their policies have had enough time for the compound interest to gather pace. On top of this their policy structures now turn up the compounding pressure as opposed to stepping on the brakes. It really puts a person in a tough position:

• You are now probably much older. Age is a huge variable when determining insurance premiums. Trying to find an affordable alternative 20 years after the fact is potentially not a viable option, or is, but so much premium has been wasted by not being cognisant and actioning this upfront. Below are different premiums for the exact same person and identical benefits, with the only difference being the client’s age:30-year-old = R70040-year-old= R119050-year-old = R248060-year-old = R4800
• Your health has possibly deteriorated. It is harder and harder to get favourable medical terms from the insurers (i.e., to be covered for your most likely claims). Should your health have changed for the worse since your existing policy’s medical underwriting, then applying with another provider might not be an option (the new provider will offer premium loadings, benefit exclusions, and declinations, all probably in relation to your most likely claim).
• For the above scenarios, you are now potentially stuck on your aggressive and unfavourable compounding path until you claim or are forced to cancel the cover earlier than you intended due to affordability

So how do you keep your life insurance premiums affordable? The truth is that it’s actually very difficult to keep your premiums down over extended periods. I don’t believe the industry wants that. The industry likes new business which means new premiums (that applies to automatic cover increases, benefit upgrades, and so on).

Nonetheless, the below should provide some valuable guidance:

Some Truths

• Insurance is an expense and should be treated as such. Contain the expense for your term. Know your long-term compounding path and be comfortable with it or try to exit it soonest. Know what brakes are available too, should the compounding look intolerable in the later years.
• Most policyholders do not put in a claim.
• Most clients do not hold these policies to the grave. One, the compounding gets out of control and makes it unaffordable – you need to plan the policy upfront to hold it for extended periods (i.e., pay more upfront for a less aggressive premium pattern). Two, does it even make financial sense to hold all the built-up cover in the later years?
• Many of these overly complicated money-back schemes and similar, do not benefit a considerable amount of their clients and are far more of a long-term commitment than people give credit for. Think of what your premiums will be in the later years to finally receive the dangling carrot (which contains far too many ifs, whats, and maybes). Compound interest on your premiums is guaranteed. Worry about that more and how that impacts you in your 50’s, 60’s, and beyond.
• The very complicated provider offerings unfortunately only market the best-case scenarios but there are plenty of people getting a raw deal.
• Don’t spend to save. Do everything you can to keep that premium down. Do not be sold unnecessarily with all the bells and whistles that are probably offered to you annually.
• This stuff should be simple. Some structures have made the long-term pricing very complicated. The complexity is intentionally baffling.
• Lastly, insurance is extremely important if you need it. Certain scenarios can prove ruinous without it. Structure your premiums in a manner you can bear.

Contain The Expense For The Term

Premium Pattern

• Should the need for your cover be only 5 or 15 years, then by all means go with an aggressive premium pattern (Age Rated or similar). Just understand this is the path where the compounding gets out of control with enough time. In this example, without cover increases, your premium goes up by just 5%. Age Rated in the later years is more like 10%. It makes a stark difference given time. Sometimes the initial cost difference between Age Rated and 5% is not much. Rather consider something like the 5% flat. At some stage, you can forgo the cover increases and then your premium goes up by just 5%. That’s building in brakes where other structures are looking to apply gas.
• Should you have a longer term, or possibly might have one (none of us have a crystal ball), rather consider a fixed 5% premium pattern or similar. In this example, without cover increases, your premium goes up by just 5%. Age Rated in the later years is more like 10%. It makes a stark difference given time. Sometimes the initial cost difference between Age Rated and 5% is not much. Rather consider something like the 5% flat. At some stage, you can forgo the cover increases and then your premium goes up by just 5%. That’s building in brakes where other structures are looking to apply gas.

Cover Increases

• Unlike premium patterns, these are voluntary and can be changed/removed within reason, during the life of the policy (your broker might not like that as they are paid for the premium increase involving the extra cover bought every year). Your cover increases are not for free. The insurer bills you for these with your annual premium increase as though you bought the additional cover for the year as new business at the older age.  Your annual premium increase is a combination of the premium pattern option and the cover increase loaded.
• Do all policyholders with cover increases actually need them? I believe the industry quite often sells these incorrectly for self-gain. Consider the below logic.  A lot of policyholders are at most risk at the beginning stages of their policy:- They’re young and haven’t built up an asset base (there’s no self-insurance).- Their dependents are young and have considerable years and expenses ahead of them before independence.-  Their debt levels are at their highest. A sensible way to take on this expense is to take the more lenient premium pattern upfront, with small cover increases, and look to cancel the cover increases at your earliest opportunity.- Then, inflation can chip away at the cover amounts bringing it in line with your reduced need (investments have grown, children are older, and your debt is that much less).-  Then bank the premium savings through lower premium compounding over the term. Put those savings to work in an investment so the compounding benefits you, in the other direction though.-  Then hopefully at some stage (60 onwards), you just hold the cover you absolutely need with reasonable compounding – a good strategy for those requiring cover in later years.
• Should you not need the cover, then a policy with good compounding can be offered to your children, etc. who may continue with the premiums. It is scenario-specific, but sometimes it’s a great investment for your child to continue with the premiums to receive the lump sum payment.

In summary, ensure you partner with a broker whose interests are aligned with yours to prevent you from being caught in an expensive long-term trap and invest the Rand difference that you shave from your premiums so that you experience the upside of compound interest. It is imperative to balance the need to contain the expense, whilst still insuring yourself appropriately.