How much does it cost to drive a brand-new, out of the box, splinternuwe BMW?
At the time of writing this post, the latest BMW 320d will set you back a whopping R660 000. If you are lucky enough to have a 10% deposit stashed and a spare R8300 pm rattling around in your pocket, you could finance the car over 48-months and be the rightful owner in 2024.
But you don’t necessarily have to pay R8300 per month if you can’t afford it!
You could probably drive that shiny new German luxury vehicle for R4999 per month by the end of this week.
“Hold on a second. How is that even possible? I mean the car’s value is the same, so how do you get away with paying that much less every month? It doesn’t make sense.”
It’s called a balloon payment.
Balloon financing means a portion of the selling price (the balloon) is payable at the end of the credit agreement. This reduces the monthly car repayments, but it means as much as 30% of the car’s value is due at the end of the agreement.
In a nutshell, only a portion of the purchase price of the vehicle is actually financed, making the monthly repayment more affordable.
Will you have the 30% in cash to square off at the end of the credit agreement? Well, that’s the question you need to have figured out for yourself before you put pen to paper.
It still doesn’t change the fact that if you wanted to, you could find yourself rolling around town in a car worth close to R700 000 for less than R166 per day.
So, what do life insurance premiums and owning a new BMW have in common?
One thing is for sure – your family will love you a lot more if you left them a R3 million life insurance pay-out instead of a secondhand beamer that’s parked in the garage the day you pass away 🙂
Financing options. That’s what the two have in common.
Now, you don’t necessarily associate financing with life insurance, do you? Houses, cars and goods, yes, but not life cover.
I mean when you get a life insurance quote, you make your decision based on the premium offered to you at the time of taking out the cover. Not necessarily the finance option used to calculate the premium.
Without you even knowing it, you’ve already benchmarked a number in your mind. “I can pay R500 a month for life cover, let me see how much I can get?” If the amount of cover offered seems to stack up with the trade in Rands each month, you are will probably take out the policy.
That’s all good and well if the premium you’ve accepted isn’t going to change for the next 20-years!
Without complicating matters this is what you need to know about life insurance financing options (how the premiums will escalate year-on-year)
There are basically 3 options:
- A premium that remains level year-on-year
- A premium that increases based on your age (Age Rated)
- A premium that increases by a fixed percentage every year
Which option is better for you?
The benefit of a level premium is that it doesn’t change every year. If you are paying R500 per month for your life cover this year, then you know you will be paying R500 per month next year and R500 per month 10 years from now.
Remember earlier in the post we mentioned that you could drive that new BMW 320d for R8300 per month on a fixed instalment basis? Well, a level life insurance premium is basically the same concept. It’s not the cheapest financing option, but as the name suggests, it remains level.
In fact, ‘Age Rated’ premium options are the cheapest by far because the premiums are worked out based on your age. The younger you are, the cheaper the life cover is. The only problem is that if you hang onto your life cover into your 40s, 50s and 60s (move through the age brackets) the increases levied against your life insurance policy can become so astronomical that the policy might well become completely unaffordable and you might be forced to cancel it.
It’s a bit like the balloon repayment on that BMW you are considering buying. On face value, the instalments look very affordable and well within your budget. The problem is that as time goes on you end up regretting your decision.
Is there another life insurance financing option that’s perhaps in the middle? A middle-of-the-road option between level and age-rated?
At Stangen we only have a fixed 6% annual increase on your life insurance policy premium (regardless of your age).
We want to provide you with a more affordable premium than a level option will offer you, but we don’t want to apply any super-aggressive age- rated premiums that look great on paper and end up costing you a fortune down the line.
We think a premium that is slightly discounted upfront and asks for an inflation-related increase is reasonable.
At this stage, your cover amount doesn’t automatically increase each year. We figure our policyholders will give us a call to review their cover needs on an as-and-when basis.
If that time is now, get hold of us on 010 020 7600
Thanks for your time.
The Wise About Life Team