STEPPED PREMIUM PATTERNS
According To Age
This premium pattern is also sometimes called renewable cover. The policy provides cover for as long as a benefit allows, but it is initially priced for a fixed period of 10 or 15 years only. (Refer to the explanation of how risk products are priced, in the section on Product Types.) At the end of this term, the benefit is extended for a further term, and the premium is automatically re-calculated for the next period, or until the benefit cease age is reached. No underwriting or intervention by the policy owner is required, i.e. the insurability of the life insured is guaranteed for the full duration of the contract. The increase in premium is determined by the life insured’s age at the time of the increase.
Some premium patterns also require a fixed step-up in premium after an initial period, e.g. 20% increase every 10 years.
Combinations of annual compulsory increases and steps
Some policies require a combination of annual compulsory increases (fixed or age-related), as well as compulsory step-ups in premium at pre-determined durations.
These are the most aggressive options available. They offer very cheap initial premium rates but may become very expensive in the long run.
The premium patterns are all explained in terms of a level amount of cover. The following options may be selected to add some growth on cover to the policy. They can be chosen at the outset and can typically be removed at a later stage if no longer required.
Fixed or pre-determined combinations
These options offer a fixed annual cover increase, for a fixed annual premium increase. For example, a 10% increase in premium each year will secure a 7% cover increase. Other options that are typically available are a 5% premium growth rate, with a 3.5% cover growth rate, or cover that grows at CPI, with premiums growing at CPI+3%.
The premium is required to increase at a percentage that is higher than the increase in cover amount, to approximate the increasing cost of each year’s additional cover as the life insured grows older.
When this option is used together with compulsory premium growth, a higher compulsory premium growth rate is required to secure cover growth, e.g. a 10% compulsory premium growth rate, for a 3.5% cover growth per year.
Scheduled annual cover increases
With these options, only the annual cover increases are fixed initially. Each year, the premium increase required will be determined based on the cost of the extra cover at that time, considering the age of the life insured at that time. This means that the additional cover becomes more expensive as the life grows older.
This allows a variety of cover increase options to be made available, ranging from fixed options, or CPI, to, for example, increases in exchange rates.
When this option is used with compulsory premium growth, the cost of the extra cover is required in addition to the compulsory premium growth rate.
Scheduled additional premium increases
With these options, only the additional annual premium increases are specified upfront. Each year, the increase in cover that can be purchased with the premium increase is determined at that time, based on the age of the life insured. Because additional cover becomes more expensive as the life insured grows older, the cover growth that is added each year reduces from year to year.
Scheduled annual cover increases provide certainty of cover, but the required level of future premiums is uncertain.
Scheduled additional premium increases, on the other hand, provide certainty of premiums, but the actual level of future cover is uncertain. The advantage of this method is also that more cover is added early in the contract term while the life insured is younger.
Fixed or pre-determined combinations of premium and cover growth provide certainty of both future premium and cover levels, but with cross-subsidies of the actual cost of additional cover over time.
Overall, all these options provide on average, similar levels of additional cover over time.
The risk curve
The underlying mortality or morbidity curve, reflecting the probability of the claim event happening at each age. This probability typically increases from year to year as the life insured grows older.