The three types of premium
As we’ve already alluded to, insurers will typically give you three options when it comes to your premiums for your Executive Income Protection Insurance policy:
- Reviewable/Guaranteed premiums
- Age-banded premiums
- Index linked premiums
Reviewable premiums will typically give you a lower initial premium but a more costly policy in the long run. With reviewable premiums, the insurer has the ability to “review” your monthly premiums during the term of your policy. When they do such a review, they may choose to increase your premiums for a variety of reasons, such as a changing attitude to risk, a change in claims volume, or other economic factors.
What this means is that your monthly premiums could rise significantly over time and you have no control over how much the policy will cost in its lifetime. A policy may well be affordable today, but with reviewable premiums, you may find it unaffordable in the future, so choosing this option should be done with caution and an understanding of the potential risks down the road.
Guaranteed premiums, as the name suggests, means that you know what your price will be over the policy’s lifetime, not necessarily that it will not change. If your policy is index linked or “age rated”, your price may still increase for either of these reasons. However, as you have in effect removed the option for the insurance company to change your price to anything they wish in the future, you will pay more for the privilege. Initially your premiums will be higher, but in the long run you may well find that the policy has cost you less than if you had taken out one with reviewable premiums. That’s not to say that is always the case, however - each individual, insurer and policy will be different.
Age-banded premiums will increase over the course of your Executive Income Protection insurance policy, however, they do so in a predictable fashion that is pre-set at the start of the policy. As you become older, you will reach age bands that will trigger an increase in your monthly policy premiums. These age bands and the amount your premiums will increase by when you reach them are laid out in your policy documentation, so as long as your price is guaranteed you know exactly what to expect and can budget accordingly. Age-banded premiums are more common among manual occupations, tending to start off cheaper but may end up costing you more over the duration of the policy.
What about indexation?
Premium indexation links your monthly benefit payments to changes in inflation, which most often means that the monthly benefit your policy will pay out, alongside your premiums, will rise each year in line with inflation. If you choose to link your policy to changes in inflation, commonly called indexation, your premiums will likely change each year even if you have chosen guaranteed premiums.
What if I do not want my price to ever change?
Simple; if you want an income protection policy with a fixed price you should select the following options:
- Guaranteed or Reviewable - Guaranteed
- Age Rated - No
- Index Linked - No
With these options selected your price will never change throughout the term of your policy, however you will pay slightly more up front and your policy may feel smaller over time as it will not be tracking with inflation.
Which is the best type of income protection premium?
As we’ve detailed, each type of premium has its own benefits and risks, with some starting cheaper and being unpredictable while others are less risky but more expensive from the get-go. As with all things related to insurance, especially business protection insurance, we strongly recommend you speak to a qualified broker to help you choose the best type of income protection premium for you. It’s likely you’ll also have other decisions to make, such as choosing your definition of incapacity and indeed the level of cover and length of policy you require, so speaking to a professional adviser will ensure you get the best policy for you.
Contact the team at Business Protection Hub
If you’re looking for advice and assistance in configuring your Executive Income Protection Insurance policy or any other type of business protection insurance, please don’t hesitate to get in touch. Our FCA authorised advisers are ready to provide you with free expert advice and guidance.