All articles · 2024-11-21 · General
What are level premiums?
Discover what level premiums are and how they work. Learn the advantages, disadvantages, and applications of this stable premium structure in insurance…
By Jan Hermans, CEO & founder of Lyff.
Level premiums are insurance premiums that remain constant throughout the duration of the insurance, instead of varying with factors such as age or risk. This means that you pay the same amount throughout the entire insurance period, regardless of changes in your personal situation or the increasing risk for the insurer.
How do level premiums work?
- Fixed at the start: At the start of the policy, the insurer determines an average premium based on your current age, expected duration of the insurance, and the risk over the entire term. Instead of paying a higher premium in later years, the amount is “levelled” over the entire term.
- Compensation for risks: Because the risk increases as you get older, you actually pay a higher premium in the first years of the policy than would be strictly necessary. This surplus compensates for the higher costs in later years, when the risk increases.
Advantages and disadvantages of level premiums
Advantages:
- Stability: You know exactly how much you have to pay each month or year, which is useful for budgeting.
- No increase in old age: The premium does not increase as you get older, even if the risk increases.
- Suitable for long term: Ideal for long-term insurance policies, such as life insurance or disability insurance.
Disadvantages:
- Higher costs in the initial years: You pay more in the first years than would be strictly necessary, which is less attractive if you terminate the policy early.
- Not flexible: In case of early termination of the policy, you may be financially disadvantaged, because you have already “paid in advance” for the later, riskier years.
Where are level premiums applied?
- Life insurance: For example, term life insurance and endowment policies.
- Disability insurance: Where the risk of payment increases with age.
- Health insurance: For long-term policies with increasing risk.
Alternative: risk premiums
In contrast to level premiums, risk premiums are premiums that are adjusted annually based on the actual risk. With this structure, you pay much less in the first years, but the premiums increase significantly as you get older or the risk increases.
Conclusion
Level premiums are especially suitable for those who value certainty and stability and are willing to pay a little more in the first years. However, it is crucial to consider how long you plan to keep the insurance and whether you can bear the higher premiums in the initial years.
Do you want to know more about which premium structure best suits your situation? I'd be happy to help you!
The math behind level premiums in your Lyff. plan
As CEO of Lyff., I often see entrepreneurs deterred by the initial cost of level premiums. In my book "Fiscale Shortcuts voor managementvennootschappen" (Tax Shortcuts for Management Companies), I explain that you should see this as a strategic cash flow decision. With a risk premium, you initially pay less, but the increase in later age is exponential. For a management company, that stability is crucial for accurately planning your 80% limit and your Individual Pension Promise (IPT) [IPT] space without annual fluctuations in your fixed costs.
Take the example of a thirty-year-old consultant. If he chooses a risk premium for his guaranteed income, he starts very cheaply. But around his fifties, just when pension accrual via the IPT accelerates, those premiums skyrocket. By leveling, you lock in a rate today that, corrected for inflation, will represent a fraction of its value twenty years from now.
Internal financing and premium pressure
Within Lyff., we often advise integrating these premiums into your broader salary optimization. Because level premiums are higher in the initial years, you immediately create a larger tax-deductible business expense in your company. This lowers your taxable profit while simultaneously building a buffer for the future. It is a form of internal financing where you realize tax profit today to cover the future increase in your operational risks.
Frequently asked questions
Can I later convert a level premium to a risk premium?
Technically, this is often possible, but it rarely makes sense. After all, you paid extra in the initial years to buy that later stability. By switching, you lose that accumulated reserve within the policy. In my book, I advise making a conscious choice at the start based on your exit strategy: if you plan to close your company within ten years, a risk premium is sometimes more interesting. If you are building a long-term machine, then leveling is the standard.
How does a level premium affect my pension accrual?
Indirectly, very strongly. Because the premiums for supplementary guarantees such as premium waiver are also leveled, there is more peace of mind in your IPT calculation. You don't have to adjust your pension premium downwards every year because your risk premiums for disability increase. It offers the peace of mind needed for true financial mastery.
Do you want to discover how to optimally integrate these premiums into your salary mix? Read all about it in Fiscale Shortcuts voor managementvennootschappen.