The Premium Trap: Why Your Life Insurance Could Price You Out When You Need It Most
Is your cover broken?
When you first take out a life, disability, critical illness, or income protection policy the premium feels manageable. You compare it to your monthly budget, it fits, and you sign. What most consumers never see is the trajectory, how that premium will grow over the life of the policy, and whether you will still be able to afford it when you are most likely to need the cover.
This article unpacks a concept known as premium patterns — the structure by which long-term insurance premiums increase over time and explains why the difference between a sustainable and an unsustainable pattern can mean the difference between being covered during a life-altering event, or not.
What Is a Premium Pattern?
A premium pattern refers to the rate and structure at which your insurance premium increases year on year. In South Africa, long-term insurers are required to disclose their escalation rates, but these disclosures are often buried in policy schedules or delivered in isolation, without the context needed to appreciate their long-term impact.
Premiums can escalate in several ways:
Age-rated increases: your premium rises as you age, reflecting the insurer's increasing risk exposure.
Fixed percentage increases: a set annual escalation built into the policy contract at inception.
CPI-linked increases: premiums escalate in line with the Consumer Price Index, i.e. inflation.
Combination structures: some policies blend age-rating with a fixed or CPI escalator, producing compounding increases over time.
The critical question is not what type of escalation applies but it is how that rate compares to the growth in your income and the broader cost of living.
The South African Context: A Widening Gap
South Africa's long-term insurance market is large, competitive, and well-regulated. But there is a structural challenge that receives far too little attention:
The average South African risk policy increases at approximately 12.4% per annum — more than three times the current inflation rate.
At first glance, 12.4% per year may not seem alarming. But the power of compounding means that a premium growing at this rate will double roughly every six years, and increase more than sixfold over twenty years. When compared with salary growth and inflation (which are both running at a fraction of that rate) the reality quickly becomes uncomfortable. Consider a middle-income earner whose salary grows at around 6% to 7% per annum broadly in line with what most South Africans experience. Their income doubles roughly every ten to twelve years. Their premium, however, doubles every six. The gap between what they earn and what they pay does not stay constant — it widens, year after year.
What the Numbers Actually Look Like
The table below illustrates what happens to a monthly premium for the same client buying the same cover that increases at the same rate, under two different escalation scenarios over a 25-year period: one at the 5% p.a., and one at the rate of 9% + Age Rated p.a. The difference is striking.
Premium Comparison
Twenty years in, that affordable-looking premium has grown to R9 817pm.
By year 25, it reaches R18 902pm — nearly R19,000 every single month, for the same cover.
A client who chose the slower-escalating option from the start would be paying R5 805pm at year 20, and R7 409pm at year 25.
One client, identical cover, vastly different financial realities determined entirely by a decision made at inception.
The Real Risk: Lapsing at the Worst Possible Time
The danger of an unsustainable premium pattern is not abstract. It plays out in a very specific and painful way: policyholders who can no longer afford their premiums lapse their policies — often during the very life stage when the probability of claiming is highest.
Think about the typical South African life insurance policyholder. They are most likely to purchase cover in their late twenties or thirties, when they have young dependants, a bond, and relatively good health. Fast-forward fifteen to twenty years: they are in their late forties or fifties. The cover is still in place, but the premium has grown dramatically. At the same time, they may be managing school fees, caring for ageing parents, or carrying higher debt. Budget pressure intensifies.
This is precisely the period in life when the risk of death, disability, a dread disease diagnosis, or an extended period of income loss is statistically highest. Lapsing at this stage does not just mean losing a policy — it means losing cover that may now be impossible to replace, either because of ailing health that have arisen since inception, or because new premiums at an older age would be even more unaffordable.
The premium pattern does not just affect your wallet. It determines whether your family is protected when it matters most.
What to Look for in a Long-Term Policy
Not all premium patterns are created equal, and not all high-escalation policies are unsuitable for every consumer. The key is understanding what you are buying and whether the pattern is appropriate for your circumstances. Here are the most important questions to ask:
What is the annual premium escalation rate, and is it guaranteed or reviewable – if reviewable, how often and at what rate? A reviewable rate can be changed by the insurer, sometimes significantly at their discretion at certain intervals.
The escalation applied to the benefit amount? Consider how your cover grows. With set escalations your cover amount will grow exponentially as well, is it necessary?
Does the policy offer a level premium option? Level premiums do not increase but are higher at inception. They may be more cost-effective over the long run for certain consumers.
Has your adviser projected the premium over 10, 15, and 20 years? A responsible adviser should show you the long-term affordability trajectory at the point of advice, not just the starting premium.
The Role of Good Financial Advice
South Africa's Financial Sector Conduct Authority (FSCA) requires that financial advisers act in the best interests of their clients. This includes ensuring that recommendations are suitable and sustainable. In practice, however, premium patterns are not always discussed with the clarity they deserve particularly because a higher escalation rate can make the initial premium appear more competitive. There are however other levers to pull to aid affordability, but this article focusses on premium patterns.
A good financial adviser will present you with a full long-term illustration of your premiums, explain the assumptions behind escalation rates, and help you stress-test affordability across different income growth scenarios. If your adviser has not had this conversation with you, it is worth initiating it yourself.
It is also worth conducting a periodic policy review — ideally every three to five years, or when life events happen like buying a home, welcoming a new family member etc.
Assess whether your existing cover remains both adequate and affordable, and whether restructuring is in your best interest.
In Summary
Long-term insurance is one of the most important financial commitments a South African consumer will make. It is designed to protect the people and the financial obligations you care about most. But a policy that becomes unaffordable is a policy that fails not because the insurer didn't honour their commitment, but because you could no longer afford to maintain yours.
The premium pattern embedded in your policy is not a footnote. It is one of the most important features of the product. Understanding it and making sure it is sustainable over the full term of your cover is not a luxury. It is fundamental to whether your policy will actually be there when you need it. Not sure whether your premium pattern is sustainable?
Fractal Capital offers independent, professional financial advice with a focus on long-term sustainability and client outcomes. We can review your existing cover, project your premiums over the life of your policy, and help you understand whether your current arrangements remain in your best interest.
