In the wake of the interim Financial System Inquiry report, Australia’s largest life insurer TAL is calling for greater recognition of the “affordable” level premium pricing method.
TAL Group CEO Jim Minto said: “Consumers are continuing to voice concerns about rising costs and pressures of manage their home budget. We have found that while most people choose stepped premiums for their life insurance which rise with age, they are overlooking level premiums which stay the same.
“Although level premiums initially start higher than stepped premiums, they can provide households price certainty for the future because families don’t have to find extra funds each year.”
Mr Minto said the reason most people opt for stepped premiums over level is because they are initially much cheaper.
“But one of the problems with stepped premiums is that people can discontinue their valuable cover as the price increases more in later life, and they may even stop paying for their cover at a stage in life when they actually most need it.”
“Stepped premiums are in many cases suitable, particularly where the need is shorter term, but level premiums provide pricing certainty and predictability over the long term.”
Mr Minto said level premiums are comparable to fixing mortgage rates, which allow for better household budgeting and planning.
“Australians are familiar with fixing their mortgage rates and locking in utility rates to manage costs, but are more reluctant to fix their life insurance premiums which, in the long run, usually end up cheaper overall.”
TAL has recommended in its initial submission (pages 13 and 14) to the Financial System Inquiry (FSI) some minor changes to the regulation of premiums to help life insurance companies make level premiums more attractive to consumers.
The submission also recommends that policies sold to people on benefits or fixed incomes such as a pension should preferably be level premiums only.
A recent example of a level premium innovation was with TAL’s new InsuranceLine funeral insurance product which now only offers level premiums.
“While over half of our funeral insurance customers were already on level premiums, we found that many on stepped premiums would give up their policies as they aged and their premiums went up, at the very time when they needed it most, so we decided to only offer level premiums to overcome affordability concerns,” Mr Minto said.
He said the life insurance industry needs to communicate better to consumers around the pricing models for each forms of life insurance: income protection, disability, life and critical illness.
Background on types of life insurance premiums can be found on TAL’s A Voice for Life consumer information portal, including an animated video to help explain, in simple terms, the difference between stepped and level premiums for consumers.
