Are your clients thinking of letting their life insurance lapse?

Here are 3 things you need to inform them of:

By: Yaaseen Albertyn, Executive Head of Business and Client Solutions at Metropolitan

Meet Nazeen.

Nazeen, affectionately called “Naz” by her friends, is a 40-year-old, single mom of three who has her hands (make that hands and arms!) full at any given time. She earns a decent salary working as a nurse at the local radiologist, but as the sole provider for her kids, she worries about what will happen to them if something were to happen to her. So Naz takes out life insurance, but one year later – and despite her 6% annual salary increase – her premium spikes, and with the rising cost of living, she finds herself struggling to make ends meet.

If this scenario were a “choose your own adventure” story, the reader would likely be offered two routes at this juncture: Does Naz allow her policy to lapse in a bid to free up desperately needed funds? Or does she dutifully keep paying her premiums, even though she is unable to afford basic expenses and is falling deeper into debt? Each route will have its consequences, and the reader is forced to weigh up the pros and cons to reach a decision.

In reality, this is the lived experience of many South Africans, says Yaaseen Albertyn, Executive Head of Business and Client Solutions at Metropolitan. “The chances of dying increase with age, and in turn, life insurance premiums go up to meet this increased risk. The unfortunate truth is that our incomes seldom keep pace with inflation – which is why so many people allow their policies to lapse and lose all cover.”

But what if there was another way? Albertyn shares three things that Naz – and you! – should know before allowing a life insurance policy to lapse.

Know that when it comes to your premium payment pattern, you have a choice.

On most life insurance policies there are three different types of premium payment options, explains Albertyn: “Age-related, Increasing, and Level. Many people are drawn to a product that offers an Age-Related or Increasing premium as they appear cheaper initially when the policy is purchased, but what they don’t realise is that these premiums will increase significantly over time.”

While they’re slowly being phased out across the industry, Age-Related premiums spike after the age of 40, as the risk of death increases. An Increasing premium, on the other hand, is typically the default option on most life cover products and incorporates a compulsory increase of around 6% – 8% every year. “With these two options, while you may enjoy a lower premium initially, you might find yourself paying double what you are paying now in ten years,” he says, “making them unaffordable for many people as they journey towards their golden years where income usually reduces after retirement.”

A Level premium, on the other hand, remains constant throughout the policy, making it the most cost-effective option in the long run. “Many people do not know about the various payment options available to them, and so they simply don’t ask,” says Albertyn, adding that Metropolitan’s life cover solution offers a Level premium as the default (with a 4% annual increase); “we strive to give our clients sustained affordability.”

Know that you can decrease your cover (and premium), rather than allowing your policy to lapse.

When times are tough, people cut costs, and insurance products (often a grudge purchase anyway) are typically the first to go. “The big downside of allowing your policy to lapse is that all the money you have already spent diligently paying your premiums each month is essentially wasted, as you retain no cover whatsoever.”

Instead of losing your cover entirely, Albertyn suggests talking to your financial services provider or adviser about decreasing your cover and paying a reduced premium. “This is certainly better than no cover at all. Many people even find that their cover needs have decreased over time – for example, many people increase their life insurance to back a bond, but once a house is paid off, you might want to look at reducing this.”

Some providers, such as Metropolitan, also offer policyholders a more flexible offering, allowing them to pay their premium at any time during the month (recognising that not everyone receives their full income on a fixed date) and via various payment channels – not only by debit order. “We also offer a premium skip benefit, and if you’re in a bind and have no other option but to allow your policy to lapse, we will still give you full cover when you restart your plan,” he says.

Know that some policies allow you to stop paying once you reach a certain age.

Yes, our risk of death does increase with age – but the unfortunate reality is that our retirement years are typically a time of frugality, as many people live off a very modest pension (if they are fortunate enough to have one!)

However, some providers, such as Metropolitan, will offer you a fully ‘paid-up’ benefit when you reach a certain age, allowing you to keep your cover but without any more premium payments.

“For example, our policyholders can choose to stop paying their premiums at age 65, but will keep their cover up until they pass away.”

And if Naz has a life cover plan that provides this premium flexibility, she will certainly have peace of mind knowing that she can add the benefit to waive premiums once she retires while ensuring that she is fully covered in her later years – when she needs it most.