Can you combat rising premiums?
It seems every other letter from an insurer these days is to advise of a rise in premiums for the coming year.
There is invariably the explanatory letter confirming that rising claims costs, compliance costs or business costs (taxation or corporate overheads) have risen in the past year. These costs are usually across the board increases affecting every policy holder.
Then there are the increases related to your specific policy. These can be a result of indexation (CPI adjustment) of your cover level, an increase in your age, or the expiry of a fixed premium period.
No matter what the cause (and the actuaries within an insurance company will be able to justify them) it is you, the policy holder, who will have to meet the additional cost.
No insurance (apart from ACC) is compulsory so the retention of any policy is a choice. It is human nature to want to protect our family, business and assets. And, insurance provides financial assistance at the time of need and provides peace of mind in the meantime.
However, it is a personal choice as to how much risk any one individual retains or how much risk is passed across to an insurer for the cost (premium) determined by that insurer to accept that risk.
So, what premium control measures are available to you.
An excess is effectively a situation where the policy holder is prepared to accept and pay for the first portion of any loss. For example, Car Insurance comes with an excess usually starting at around $250. If you have an accident, you pay the first $250 and the insurer picks up the balance. It is possible to take a higher excess for a lower premium. Excesses are available on home, contents, car, business and medical insurance policies.
A policy with an exclusion is where a particular event is excluded from the policy. In respect of life and disability, exclusions imposed by the insurer don't translate into premium reductions. However, some insurers will offer a premium discount where exclusions are voluntarily taken up. For example, on Disability Income Protection if you select a "spine" or "mental health" exclusion for any claim, then a lower premium is available.
I'm personally not a fan of self-imposed exclusions as it diminishes the scope of the policy cover - and who knows what may lead to a claim.
For commercial property it is possible to not insure for Natural Disasters (Earthquake Cover) and for motor vehicles you can provide named drivers to achieve a discount.
For commercial insurance, if your building is under insured you may have to pay part of any claim. For example, if a building has a replacement cost of $2,000,000 and you are insured for only $1,000,000 the insurer may treat every claim as being insured for 50%. So, even a small claim would require the policy holder to meet half the claim even though the sum assured on the policy is greater than the amount of damage.
The best way to save premiums on life cover is to pay more for it at the start. I often see people who take out life cover for a specific purpose today and with a short term view to retaining the cover. Whether it be in relation to debt or raising a family the view held is the policy will be cancelled at some stage in the not too distant future. Consequently cover is purchased at today's age and increases each year. This is fine for folk in their 30's where $500,000 of cover can be purchased for around $35 per month. For folk in their 50's this cover can cost up to $250 per month and in their 60's it balloons to $950 per month.
We often see dentists in their 50's and 60's who require life cover for all sorts of reasons - business partnership, debt, second marriages, personal guarantees etc. This rising cost becomes a significant factor in purchasing or retaining cover.
The alternative is to use a Level Premium - a premium that does not increase each year. A $500,000 level premium to age 80 for a 30 year old is less than $95 per month. This provides cover well in to the future at a long term sustainable rate.
Total Permanent Disablement and Trauma cover can be bought either as standalone benefits or attached to life cover. On a standalone basis the premium is greater as the benefit is payable should an event occur. (In respect of Trauma Cover this requires the insured to survive the event by 14 days).
Where the benefit is attached a life cover there is a discounted premium as the benefit is payable only once. If a Disablement or Trauma benefit is paid then the life cover benefit is reduced by the amount paid. Presuming the need for the cover is the same in respect of Death, Disablement or Trauma then it is a cost effective way to manage cover using "Accelerated Benefits".
It is possible to reduce Disability Income Protection premiums by taking a longer "Wait Period". This is the time from when your absence from work commences to when the insurer starts paying your benefit. On the face of it substantial premiums can be saved. Moving from a 30 day wait to a 90 day wait equates to almost 50% in premium savings with most insurers.
The experience of NZDIS is our average claim lasts 6 weeks and cover is for both personal income and practice overheads. If you opt to defer the benefit commencement to 30 days, that is a substantial shortfall of income to a practice. Given business continuity and life-style preservation are directly linked to income we continue to champion full insurance for Disability Cover.
The premiums include GST and are a deductible tax expense so the true cost is not as great as it seems when compared to the alternative - nil income and ongoing business costs for a chosen period of time.
Whatever options you consider we always recommend you discuss these with your advisor.