Words on wealth: the dangers of going for cheap life insurance

In this second article on life insurance, I look at level versus escalating premium patterns, why you get what you pay for, and how life cover fits into your long-term financial plan. 

Here’s a quick recap from last week (“Understand these basics before buying life cover”, Personal Finance, June 14, 2025). Insurance companies price their cover according to the risk you pose of claiming, which is assessed in the underwriting process. There are two levels of underwriting: initially at a generic level, where policyholders with similar attributes are grouped in an underwriting pool; secondly, at the individual level, where your personal health status is assessed. Premiums are determined according to actuaries’ risk assumptions of the underwriting pool and then adjusted on an individual level if you have specific health issues. 

The pricing at the pool level is not guaranteed for the life of the policy – policies typically come with a guarantee period of 5, 10, or 15 years, beyond which the risk of the underwriting pool is reassessed, resulting in a possible increase in premiums across the pool.

Premium patterns

Verlyn Troskie, head of retail distribution at Sentio Capital and Certified Financial Planner with a deep knowledge of financial products, explained that insurers have different ways of pricing cover.

With a level premium pattern, there will typically be an inflation-linked annual escalation (of, say, 5%) commensurate with an increasing cover amount. With an age-related premium pattern, there will be an additional annual escalation according to a fixed percentage rate related to your age. 

Opting for an escalating age-related premium in addition to the inflation-linked escalation makes your initial premium lower, but the compounding effect of this selection could eventually make the premium unaffordable, Troskie says.

“Any selected escalation in premium may be cancelled at any time, but this will lead to an adjustment in the premium, which could also be unaffordable, leading to the need to reduce the cover amount. People fail to take into account that premium escalations that compound over time normally exceed salary increases, and could lead to a negative outcome at a time when the client most needs the cover in place,” he says. 

Although these premium patterns would be made clear in the policy document, with examples of future pricing, an adviser intent on selling you a policy may focus on the low initial premium, disregarding how the rising premiums may affect you in the future.

“When brokers are competing for business, they will generally not go for the level premium because it will be priced higher initially. But the level premium forces you to pay a larger portion of your risk expense upfront so that the increases don't compound you to death,” Troskie says.

Cheap can be pricey

Troskie says you also need to be careful when deciding on a quote. Typically, an adviser will get a number of quotes, say from three different providers, and it’s natural to opt for the lowest. “The problem here is that, when you go with a company that charges a very low premium compared with what the market charges, you have to stand back and ask why. How are they pricing risk in order to give you this low premium? That is something the client doesn't understand and it's something the adviser often doesn't explain,” he says. 

“If the average quote comes in at say, R900, and one company comes in considerably lower at, say R700, you must ask why the premium is so low. Are the benefits correctly quoted across all risk policies? What are they not pricing in? At what point am I going to pay the price for the low premium? Will it be a rejected claim? Will it be some massive increase in the future, at a time when I cannot afford to take out new insurance or when I am uninsurable? Because at some point you're going to pay the price,” he says.

Troskie says insurance companies generally publish their claims statistics. It is here where a consumer can generally judge the ability of an insurer to pay a claim relative to its competitors.

Life cover and financial planning

Theoretically, life cover is something you need for a particular window in your life, typically from your early 30s to mid-60s, from when you buy your first property and start a family until you retire.

“From an advisory perspective”, Troskie says, “life cover is not supposed to be something you keep for life. That's not its purpose. Technically, you don't need it when you're young, because you don't have dependants or debt. As you build your asset base over your career, your life cover should, in theory, be reduced to the point where you just need some cover to pay immediate expenses on death and any liquidity shortfalls in your estate. Good financial planning should put you into that position.” 

A good financial planner will always be able to assess how much life cover is needed and appropriate at any point in time by doing a thorough financial needs analysis and revisiting the client annually for a review. 

Troskie says that young people who don’t really need life insurance but want to benefit from the lower premiums accorded to healthier people can buy a small amount of life cover, and add deferred cover. “For a small additional premium, you can take out cover for later in life and not need further underwriting. So there are ways to structure it.”

In a recent article on life cover in retirement, Justin Wendover, Certified Financial Planner at Alexforbes, said he often encounters clients who, on reaching retirement, still hold significant life insurance. “As you grow older, the need for life cover typically decreases and, if you have planned correctly, your investments should be adequate to fund your income needs during retirement. If you feel the need to retain cover because, say, you want it to supplement your surviving spouse’s income, it’s important to conduct a proper needs analysis to determine whether the cover is truly necessary or simply a nice-to-have,” Wendover says.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE