Life insurance premiums rising disproportionately to cover

alexst

I was very pleased to find a good deal for my life insurance, via MSE. I indicated that I wanted my premiums and cover to rise in line with inflation. I recently had a letter from Bright Grey asking me to confirm that I was happy with the increased premium and cover.

However, the cover increase (+5.2%) was not consistent with the payment increase (+6.5%). When I wrote to the company they replied with an example:

We have calculated the rate of inflation by using the Retail Price Index which is declared by the UK Government each month, and the rate we apply to your plan's cover will be the increase in the rate over the 12-month period ending 3 months before your plan anniversary. This rate will be no less than 2% and no more than 10%. Once we've calculated the increase in cover, we calculate the cost of this using:

The original plan rates
Your current age and
The remaining term of the cover.

Example of how this works (note this is hypothetical not a real quote)
Original cover: £75,000 lump sum with increase at RPI chosen, original premium £10.52pm
Level of RPI 3 months before plan anniversary 4.3%
£75,000 x 4.3% = £3,225 extra amount of cover
Cost for £3,225 cover based on current age, term remaining and original rates tables = £0.26pm
New plan premium for the next year £10.78pm

If I apply this calculation to their proposed new premium for me:

Original cover: £500,000 with increase at RPI chosen, original premium £16.78
Level of RPI 3 months before plan anniversary 5.2% (based on reverse calculation from brightgrey letter)
£500,000 x 5.2% = £25,850 extra amount of cover
Cost for £25,850 cover based on current age, term remaining and original rates tables (hidden variable) = £1.09
New plan premium for the next year £17.87

My current age is 33 (policy +1 year), the term remaining is 19 years (policy -1 year), so basically that's hardly changed. What this shows is that the "original rates tables" are setup to offer customers a worse deal each year progressively.

If my policy increases by 5.2% a year, but the premiums increase by 6.5% a year, I end up with a pretty bad deal:

Year 1 policy ratio (cover : premium) = 29797:1
Year 20 policy ratio = 23781:1

I imagine that the gap between cover increase and premium increase may widen as I get older, which makes this worse!

Now I understand that the cost of life insurance increases with age, but they've already priced by risk in the policy (500,000 over 20 years) so I was surprised that the premium increases don't follow that risk profile or policy ratio.

It looks to me like a great way of offering a sweet deal at the start to get me in the door, then souring it over time! Has anyone else experienced this? My instinct is to refuse the policy increase (Bright Grey are good on that, I can opt out) and get (compete) a new policy every few years to cover the inflationary shortfall.

dunstonh

Now I understand that the cost of life insurance increases with age, but they've already priced by risk in the policy (500,000 over 20 years) so I was surprised that the premium increases don't follow that risk profile or policy ratio.

The priced the original sum over 20 years. Each increase is priced on the new age. However, they do apply the using original premium pricing (so if market rates go up, you will not suffer them)

My instinct is to refuse the policy increase (Bright Grey are good on that, I can opt out) and get (compete) a new policy every few years to cover the inflationary shortfall.

It sounds like you would have preferred a yearly renewal term assurance rather than a level term assurance with indexation.

ACG

To the OP, that is correct.

In effect the Increase in premium is 1.? x what your premium increases by.

when i used to be an account manager for a life insurance company this was one of the sales angles we used to win business as the company i worked for didnt do that, the premium increase at the same rate as the benefit.
The vast majority of companies do no increase at the same rate only a few do.
Rubbish isnt it! I was quite surprised when i found this out.

I cant remember the companies that do it fairly off the top of my head but it could be worth contacting your advisor and asking him to look for one that does what your after.

kingstreet

The last time this came up, I remember working out the difference between accepting the increase and changing the cover every year for a new plan.

IIRC taking the increases was the cheaper/easier option.

I'd just like to say I hate having to explain this to clients. It's a complete PITA.

magpiecottage

Why do you need the cover to go up?

This may sound an odd question but it is really related to why do you need the cover at all.

If it is to pay off a mortgage then the cover required will not go up unless you change the mortgage.

If it is to protect your family then every year they will get closer to being financially independent so the time that they need to eke out any lump sum will shorten and the amount required will probably fall.

If it is to provide for inheritance tax then if you survive the term it will not do the job.

kingstreet

I find it applies more to income protection, TBH.