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.

- MARTIN HESSE

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 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 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.