Why Millennials Need to Get Life Insurance Now

Ahhhh Life Insurance, life’s most sensible form of gambling. No one likes insurance, even the CEO’s of life insurance companies don’t like paying for it. But when you’re young, acquiring life insurance could not be more important.

The majority of Australians do not look at insurance until they are older, not only does this pose a high risk of people being underinsured for years, but the long term costs of insurances could substantially be reduced by acquiring insurance under a ‘Level’ premium structure at a younger age.

What is a ‘Level’ premium? A ‘Level’ premium in a nutshell means you pay more for the insurance initially, but your premiums do not increase with age1 like a normal ‘Stepped’ premium would.

Why does my life insurance go up with age but my car insurance go down with age? The answer, risk! Statistics shows that as you get older you are more likely to claim on life insurance. As you get older, your risk of illness, injury and death increase (this is no secret!). With car insurance, older people tell to claim less, they are more experienced on the road and tend to take less risk when driving compared with younger people hence insurance premiums going down with age.

In this article I want to show the benefits of a ‘Level’ premium and why young people need to look at acquiring life insurance now as opposed to waiting until they’re older.

For the purpose of this example, we will use ‘Leigh’, a 26-year-old Electrician working full time and earning $70,000 + Super per year. Leigh is single, a non-smoker, owns his own home with a $250,000 mortgage. Leigh is a smart young lad and realises he needs insurance.

We will assume Leigh only wants to pay out his debt with Life & TPD insurance, one year of gross salary before Super in Trauma insurance and also wants to look at Income Protection2. This will mean $312,500 of Life and TPD insurance, $70,000 of trauma insurance and $57,487 per annum ($4,791 per month) of Income Protection insurance3.

Firstly, how much would this cost? The figures below are real and based on the example above.

Stepped Premium
Cover Type Sum Insured Premium Per Month
Life $312,500 $20.25
TPD $312,500 $14.75
Trauma $70,000 $6.59
Income Protection* $4,791 per month $141.95
Total   $183.54

 

Level Premium
Cover Type Sum Insured Premium Per Month
Life $312,500 $28.33
TPD $312,500 $22.58
Trauma $70,000 $11.63
Income Protection* $4,791 per month $193.61
Total   $256.15

*30-day waiting period, ‘to age 70’ benefit period. Premiums or sums insured not indexed to indicate cost in ‘today’s dollars’. I have assumed all insurance is funded ‘out of pocket’ for the purpose of the example.

The total difference between a ‘Stepped’ premium (a premium that goes up with age) and a ‘Level’ premium (one that does not) is $72.61 per month. The Stepped premium is nearly 30% cheaper, which looks attractive, but what does this extra 30% cost save Leigh in the long term? In short, over $400,000 in today’s dollars. That’s not a typo, $400,000 between now and when he turns 70 by locking in his premium and paying 30% extra now, he can save $400,0004.

Leigh has a co-worker, Bob, who talks to Leigh about his insurance. Bob unlike Leigh, never saw the value of insurance, until his brother was in a car accident and did not have life insurance. Bob watched his brother lose the family home because he could no longer work and produce an income to pay mortgage payments. For the sake of the example, we will assume Bob is in the exact same financial situation, the only difference is, Bob is 50 years old. Bob goes to apply for the same levels, through the same company.

This is the result:

Stepped Premium
Cover Type Sum Insured Premium Per Month
Life $312,500 $58.10
TPD $312,500 $85.99
Trauma $70,000 $52.35
Income Protection* $4,791 per month $531.93
Total   $728.37

 

Level Premium
Cover Type Sum Insured Premium Per Month
Life $312,500 $151.63
TPD $312,500 $233.56
Trauma $70,000 $102.08
Income Protection* $4,791 per month $829.83
Total   $1,317.10

*30-day waiting period, ‘to age 70’ benefit period.Premiums or sums insured not indexed to indicate cost in ‘todays dollars’. I have assumed all insurance is funded ‘out of pocket’ for the purpose of the example.

 

A 400%+ increase in Stepped premiums and a 500%+ increase in Level premiums and this is just the beginning! If Bob waited until age 55, that $728.37 per month for a Stepped premium, turns into $1,214.04 per month. Far from sustainable on Bob’s income.

The highest level of cancel rates for insurance happen after age 50 and the above example shows why. Under a Stepped premium, insurance begins to get sustainably more expensive after age 50, so people cancel it. Unfortunately, this is also the time when most people tend to claim.

In addition to this, younger people are generally healthier and are less likely to have health conditions that may result in exclusions or loadings affecting the premium or possibility of getting cover.

These are the reasons why millennials needs to look at getting Life Insurance advice NOW. Not only because they need it, but it gives them the best chance to afford it.

  1. https://www.moneysmart.gov.au/insurance/life-insurance
  2. The premiums used in this article are real life figures based on the examples given. The levels of cover chosen were specific to the client’s goals in regards to insurance and do not represent ideal levels. Please consult with a Financial Adviser as your goals and objectives may differ from the examples given.
  3. Income Protection benefit based on 75% of gross income including Superannuation, paid monthly.
  4. Based on the Stepped vs Level report produced by the insurance company associated with the example.

Information current as of 30 March 2017

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

 

 

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