I am going to take out Income Protection Insurance but wasn’t sure what is best: reviewable or guaranteed premiums? What is the difference between the two types?
When taking out an Income Protection policy there is an option for you to decide if you would like guaranteed or reviewable premiums, and there is a very big difference between the two.
With guaranteed premiums the monthly premiums you pay would remain fixed over the entire life of the policy.
For example, if the monthly premium was £30 at the start of the plan it would also be £30 at the end of the plan. In other words, the insurer ‘guarantees’ not to change the premiums unless you change the policy in some way.
With reviewable premiums the insurer has the right to change the monthly premiums over time. These changes may be due to your rising age and the insurer’s attitude towards risk based on average claims and wider economic factors.
This means that the monthly premiums you pay could rise significantly over time and you have no control over how much the policy will cost over its lifetime.
With long policy terms, such as over 20 or 30 years, the total amount of premiums paid usually works out cheaper with guaranteed rates rather than reviewable, even though premiums are initially higher with guaranteed rates. This is especially the case for younger workers who can gain very low fixed premiums.
Which type of premium is best for you will depend on your specific situation so it is usually best to speak to an adviser first. One of the issues with reviewable premiums is that the monthly cost can rise significantly over time so it important to ensure that the plan is affordable both today and in the future.
One point to watch out for is that some insurers specifically increase premiums with age and can therefore offer very low premiums today that rise significantly over time, sometimes by over three times the initial premium. With these plans the policy terms should contain a table setting out likely premium rises with age.
It is important to note that if you decide to add the option to link your monthly benefit to changes in inflation then it is usually the case that both the monthly premium and the monthly benefit will rise each year with inflation, even with guaranteed premiums.
This is to compensate for the fact that your benefit is rising with inflation each year.
If you’re looking to take out Income Protection it might be a good idea to speak with an expert. At Drewberry, we know all the insurers products inside out. We have access to the whole of market and offer a fee free service for our advice. Our telephone number is 02084327333 or alternatively you can email us on firstname.lastname@example.org
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.