What are the benefits?
By using this strategy, you could potentially:
- pay a lower average premium over the life of the policy, and
- make your cover more affordable at a time when you need it most.
Reduce the long‑term cost of your insurance
– Wealth Protection Case Study 6 –
Tom and Harry are both aged 50 and each own 50% of a concreting business valued at $1 million.
To protect their respective interests in the business, their financial adviser has recommended they execute a Buy Sell agreement. (see Strategy 3) And fund the agreement by each taking out $500,000 in self-owned Life insurance.
Their adviser also explains it will be even more cost-effective over the longer term if they pay level rather than stepped premiums. This is because, over the next 15 years, they’ll both pay level premiums totaling $64,488. This is compared to a total of $78,973 if they choose stepped premiums.
Level premiums, for this wealth protection case study, could therefore save them each $14,485 over the next 15 years. (or $8,540 in today’s dollars). This is in addition to the savings they could make by holding the insurance in super.
Furthermore, if they both pay level premiums, the cost in year 15 (for example) will be $7,573 each, compared to $14,030 with stepped premiums. In other words, level premiums could be significantly lower in the later years, when the cover is needed most. However, if Tom and Harry only needed insurance for a shorter time period (eg five years), it may be more cost-effective if they opt for stepped rather than level premiums.
Wealth Protection Case Study – Insurance assumptions:
For simplicity purposes, we’ve assumed Tom and Harry pay the same premiums. In this example, these premiums are based on MLC Limited’s standard premium rates as at 28 April 2015. For non-smoking males, aged 50 with $500,000 in Life cover increased by 5% each year and includes a policy fee. In reality, they may pay different premiums based on factors such as their age, health and the amount of insurance each of them requires to protect their respective business interests. However, they are both likely to save money over the longer term if they select level rather than stepped premiums. This is for illustrative purposes only and you should refer to the relevant disclosure document before making an insurance decision.
Note: This case study highlights the importance of speaking to a financial adviser about the best premium payment option when taking out insurance. A financial adviser can also address a range of potential issues and identify other suitable protection strategies – see Tips and traps below.
1 Assumes an inflation rate of 3% pa.
Wealth Protection Case Study Tips and Traps
- You may want to take out part of your insurance using stepped premiums and use level premiums for the rest. This way, the premium in the earlier years will be lower than if you opt entirely for level premiums. Over time, you could then reduce your stepped premium cover as you build up more assets and potentially need less insurance. As a result, you could end up paying level premiums on most (if not all) of your insurance in the later years, and benefit from the lower premium costs associated with level premiums at that time.
- The earlier you lock in the level premium, the greater the potential long-term savings. This is because level premiums are based on your age when the policy commences and are generally lower if you take out the cover at a younger age. However, as you approach age 65, the difference between the two premium structures diminishes for new policies.
- Level premiums could make budgeting easier, because you have a greater degree of certainty regarding what your insurance is going to cost when compared to stepped premiums.
- It could also be more cost-effective over the longer term if you pay level rather than stepped premiums when using insurance for personal (ie non-business) purposes.
To find out more about this and other personal protection strategies, ask about our ‘Protecting you and your family’ here.
If you want to know more on how to reduce the long‑term cost of your insurance contact us here about your insurance enquiry today.
Disclaimer: This article is factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future. For information about a loan that may be suitable for you, call us on 7111 0022.
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