If you took out your life policy 10 or 15 years ago, you must speak to your financial advisor. Depending on your life insurance premium pattern and the guarantee period, you could experience a premium increase shock. This is due to increased mortality rates, increased claims for illness and clients holding on to cover for longer.
Shirley, a financial advisor, contacted me when her clients with Hollard and Liberty experienced annual premium increases above 40%. In my investigations and discussions with other financial advisors and insurers, I discovered that many advisors had clients who experienced increases from various insurers in the last few years.
The reasons for the increases are either the way the product was designed, as in Liberty’s case, or in the case of Hollard, the way premiums were reviewed once the guarantee period had expired.
When you take out a life insurance policy, the fine print may mention a guarantee period. This means the premiums and agreed escalations are only guaranteed for a specific period, usually between 10 and 15 years. After this point, a life insurer may be entitled to review the premiums based on the future expected claim experiences.
If there have been changes to expected claims rates, they can increase that premium to reflect the new risks. Some insurers will offer a guarantee that the increase will be capped. For example, Discovery Life and BrightRock both limit the increase to a maximum of 20%. In the case of Discovery, this limit is only applied until the policy has reached its 20th anniversary.
In some cases, the insurer resets to a higher premium and provides a further 10-year guarantee on the new premium; other insurers choose to increase incrementally each year to lessen the impact, but there is no further guarantee period. A guarantee period usually means a higher premium initially, but more certainty around future increases.
“What they are trying to cater for is potential unexpected changes in the risk model. Since the pandemic, the risk pool has changed. We are seeing increases not due to a client’s individual health but a risk pool in a category,” said certified financial planner Markus Bauriedl of Lifeforce Financial Services, who added that while it does not affect all clients, if a client falls into a category of risk assumptions where actual claim experience or lapse rates deviate from those predicted, they could experience a premium shock.
“There have been far higher premium adjustments, and the alternative offered to clients is to reduce the cover if you do not accept the premium adjustment. Sometimes, one may consider moving insurers; however, this involves medical underwriting,” said Virath Juggai, certified financial planner at Gradidge Mahura Investments.
Hollard has implemented a 25% increase in premiums for policyholders whose guarantee period had ended. This is in addition to the usual premium increases. As Shirley’s clients were on age-rated pattern increases and their cover benefit was adjusted for inflation each year, the total premium increase was 41%.
Wikus Luus of Hollard explained that at this stage, the increase will only affect life insurance policies, not critical illness or disability policies. These policies were all former Altrisk clients, which offered cover for clients whom other insurers may have turned down for pre-existing conditions. Most of these policyholders have reached the 15-year mark, and their policies are now subject to new risk premiums.
“We do regular experience analysis to the assumptions in the pricing model. In an investigation in 2024, we saw a significant change in the cost of claims due to a higher mortality experience and policy persistency levels,” said Luus, who added that while at this stage, they did not have to increase critical illness or disability premiums, this was due to a low take-up of those products 15 years ago.
“There is definitely an uptick in critical illness and cancer. There is an increase in disability claims relating to mental health and lower back issues.”
Not all insurers have experienced significant changes to their claims experience. Momentum Life Insurance said the insurer had not applied any general premium increases on existing policies.
“It is worth mentioning that this is where long premium guarantees become particularly valuable,” said George Kolbe, head of Life Insurance Marketing, who explained that Momentum Myriad policies have the longest premium guarantee in the market.
Speaking to several insurance companies about their claims experiences, a common theme emerged. People are not living as long as expected and lapse rates have decreased. Covid-19 certainly had an impact on mortality rates, but there are other lifestyle factors impacting claims, including increased obesity, cancer and diabetes.
It is about a risk pool, not your health
“When clients take out life insurance cover they become part of a ‘risk pool’ of lives with whom they are now sharing the risk. It is important to help clients understand that their own health actions, and collectively those of the whole group, will determine whether their premiums go up, stay level or come down at future review dates,” explained John Kotze, head of Retail Protection Product Marketing, Old Mutual.
How lapse rates affect premiums
Lapse rates have declined as people are more inclined to hold onto their life cover. During the pandemic, there was a surge in demand for life cover, and people were less likely to let policies lapse. Bauriedl says more stringent underwriting also drives high retention rates on existing policies.
“If people have existing cover, they are finding it harder to switch,” said Bauriedl, who adds that in his experience over the last few years, the number of client applications that did not require exclusions or premium loading was less than 10%.
Policyholders who lapsed their policies were, to some degree, cross-subsidising those who kept the policy for the full term. With lapse rates changing, so are premiums.
Kotze explained that if a 30-year-old wants life cover of R5 million, they might be charged R800 per month. The life insurance company determines this rate based on different assumptions about the future experience, based on what has happened in the past, including how many people will lapse their policies early. Knowing that not everyone will keep their policies for life allows your insurance company to charge a lower premium.
The biggest expense on a life policy is a claim; if someone dies, that R5-million claim must be paid. But, if, over time, 40% of people don’t claim and still pay premiums for a part of that period, then the average premium for a group of customers may decrease.
“If every person who purchased a life insurance policy kept it for life, your life insurance company would probably need to charge a client R1 200 per month because they will need to pay all those R5-million claims,” explained Kotze.
Questions to ask your advisor about your policy
- Do I have a premium guarantee and when will it expire?
- What has your experience been with this insurer where the guarantee has expired?
- What is my premium pattern and how are my premiums expected to increase over time?
- What are my options if I can no longer afford my cover?
- Is my cover designed to end when I no longer need it?
- Is the level of cover that I selected upfront still appropriate or should this be reviewed?
Understand your premium pattern
In the case of Liberty, the increases were not due to a guaranteed premium review but rather as a result of how the product was designed and, specifically, the premium pattern that had been selected. The policies in question were on the renewable premium pattern, designed to have lower premiums for the first 15 years initially and then premium increases every five years on policy renewal.
“At this point, the premium rates are adjusted and will be based on the client’s current age. This increase is part of the product design, not because of a premium guarantee review. The benefit design intends to offer protection for a fixed term, for example – to cover a home loan but with the ability to extend the cover to whole of life if needed,” explained Liberty.
Clients could have other types of increasing premium patterns such as age-rated premium patterns which are designed to increase premiums as the client gets older but with a very low premium at the start.
Bauriedl says these types of accelerated premium patterns are not unusual as individuals may need significantly more coverage during the ages of 30 to 50 years old, but may not be able to afford the premiums at that stage.
Selecting a premium pattern that is lower when they are younger but which increases over time means the client has the cover when they need it and can either reduce the cover or cancel the policy when it is no longer affordable. Alternatively, one could take out term-insurance, which is only for a specific period of time. Insurance companies like BrightRock have designed policies that match the period of the insurance with the timeframe of the clients’ needs.
This highlights the need for an annual review of all your policies. Ensure you understand what cover you have bought, how it matches your needs, and how your premiums will change over time. If your guarantee period is about to expire, you should discuss your options with your advisor.
This article was first published on News24 on 3 February 2025.
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