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Guarantees
The insurer therefore gives a guarantee – this could differ from insurer to insurer, and from product
to product – that the basis of his rates would remain the same for a specified term: The
guarantee
term
. The guarantee term would apply to the first few years of a whole life policy. The longer the
guarantee, the higher the rates (because of the bigger risk that the insurer is taking onto himself).
What happens at the
end of the guarantee term
? Once again this could differ from insurer to
insurer and from product to product. The norm is to guarantee that once the guarantee term has
expired, the basis of the rates would only be changed if the insurer’s claim experience and future
expectations differ significantly from the assumptions used when the original rate was calculated.
(Note that the basis of the rates
won’t
be affected by the life insured’s higher age or new health
status.)
Even here, after expiry of the original guarantee period, there is room for more guarantees. The
insurer could conceivably offer a
rate cap
- a guaranteed maximum percentage with which the
insurer could potentially increase the rates after expiry of the original guarantee term. But with
every guarantee that is added, the rates will also have to be increased to reflect the additional risk
for the insurer.
If the rates have to be increased at the end of a guarantee period, there will be a choice: Either
increase the premium to maintain the same cover amount, or reduce the cover amount in order to
retain the same premium.
Premium patterns
Once the risk has been priced appropriately, it still has to be distributed over the term of the policy.
This distribution could take on the form of several possible premium patterns. For instance, the
premium as well as the cover amount could remain constant over the duration of the period (
level
payment pattern
). Or the premium could start out lower but escalate annually at a chosen rate
over the period while the cover amount remains constant (
compulsory growth payment pattern
).
It is also possible to arrange for an automatic increase in the
cover
amount every year, in which
case the
premium
will also have to be increased annually (usually at a higher rate than the actual
cover increase rate).
Why are there so many choices? Because every individual has different needs and circumstances.
The client’s age and financial status at inception will probably be the determining factors when
choosing an appropriate payment pattern. For example, a young client may need a substantial
amount of life cover, but may not be able to afford a high premium while he’s still struggling to get
on his feet. He will be grateful to have the life cover right away at a lower initial premium, knowing
that he’ll be in a better position to afford the higher premiums later.