Guaranteed vs Reviewable Life Insurance Explained
In this week’s blog, I will define and compare reviewable protection policies against guaranteed policies.
While Reviewable policies were once popular and are still sold, I generally do not recommend same.
I believe much of the skepticism around life insurance stems from the structure of reviewable policies.
What are they?
Reviewable (or unit linked) Life Insurance: (also available with critical/serious illness cover and income protection) The premium on a reviewable policy purchases ‘units’ in an investment fund and these units pay for the cost of the cover. The cost of cover is not locked and is assessed annually. As you age, more units are required to cover the cost of the protection. . The investment performance of the underlying units determines how much additional premium is required to sustain the policy. Periodic reviews are conducted where the premium is raised and/or the benefit is decreased as necessary to continue the policy.
Guaranteed Life Insurance: (available in term life, whole of life, serious/critical illness and income protection) The premium is set to reflect a set cost for the duration of the policy, either a set term in years or for the whole of your life. As the cost is spread evenly over the term, the rate does not change. The rate and benefit remain level for the entire term unless you opt for inflation protection which will include annual increases but again at a guaranteed rate set at policy inception. No cash value or units are applicable.
Pros & Cons
Reviewable (or unit linked) Life Insurance:
Pros:
Low initial premium. As the rate is assessed annually, you pay the premium based on the your current age. This is also on the cons list, as you will then receive higher premiums as you age.
Encashment value. The units purchased with your premium hold value, should you surrender your policy, the value of the units is payable to you.
Cons:
Unaffordable premiums later in life. As you age, your policy premiums increase and require more units to be encashed to sustain your policy. Policy reviews can have 200%+ increases in premium, often at a time when the policy owner will not longer qualify for a new policy -leaving people without cover at a time they are most in need.
No guarantees: Many are sold with the impression that they are whole of life policies, while technically they can continue for the whole of the policy owner’s life, their cost makes it nearly impossible to do so.
Guaranteed Life Insurance:
Pros:
Locked premium for your chosen period of time. There will be no increase in cost or policy review at any time.
Lower life long cost of cover. The accumulative cost of cover will be lower in the long term than with a comparable reviewable policy as they are not subject to premium increases.
Cons:
No encashment value. Guaranteed policies do not invest in units to fund the policy and hold no cash value. Compare it to your home or motor policy, you pay in each year to ensure you are covered but hope not to need it.
Higher upfront cost. When comparing the initial rate of a reviewable vs guaranteed policy, the reviewable policy will offer a lower premium.
In Summary
While there may be cases where a reviewable policy is suitable, I have yet to advise a client of same. If you have a reviewable policy, ask your adviser to detail your next review date, the performance of the underlying units and projections on how long your current premium will sustain your policy benefit(s). If you are in good health and will qualify for a new policy, compare your policy against a guaranteed policy.
As always, feel free to contact me with any queries on the above.
Rachel O’Shea, Protection Manager