Guaranteed vs reviewable executive income protection premiums
When you compare executive income protection quotes, the lowest monthly premium is not always the cheapest option over the life of the policy.
It’s also worth checking how the premium is calculated. Some are guaranteed, while others can be reviewed by the insurer or increase as you get older.
What are guaranteed premiums?
With guaranteed premiums, the insurer cannot simply increase the price because you have become older or because its overall claims experience has changed.
The premium agreed when the policy starts will generally remain the same for the chosen level of cover.
This can be useful with executive income protection because you might keep the policy for decades. A director taking out cover in their 30s or 40s may still have it as they approach retirement.
Guaranteed doesn’t mean the amount leaving your company’s bank account can never change. If you increase the benefit, alter the policy or have cover that increases with inflation, the premium can change too.
How do reviewable premiums work?
A reviewable premium isn’t fixed for the full term of the policy.
The insurer can review the price at intervals set out in the policy. Depending on the terms, the premium may rise, fall or stay the same after a review.
Reviews can take account of the insurer’s claims experience, costs and the assumptions it uses to price the cover.
You won’t know exactly what the policy will cost in future when you take it out.
A reviewable policy may be cheaper to begin with, but your company could end up paying more for it later.
What are age-banded premiums?
Age-banded premiums are designed to increase as you get older.
They can be relatively cheap when the policy starts, particularly for a younger director, with the premium increasing over time.
These increases don’t necessarily mean anything has changed with your health. They’re part of the way the policy is priced from the outset.
If you’re comparing age-banded and guaranteed cover, don’t just look at what you’ll pay at the start. An age-banded premium will rise as you get older, so check what you’re likely to be paying further down the line.
How do the three premium types compare?
| Premium type | How it works | Main consideration |
|---|---|---|
| Guaranteed | The underlying premium for the agreed cover is fixed | Greater certainty over long-term cost |
| Reviewable | The insurer can review the premium under the policy terms | The future price is less certain |
| Age-banded | The premium increases as you move through age bands or get older | Can start lower but becomes more expensive with age |
Are guaranteed premiums more expensive?
They can be more expensive at the outset, although it depends on the insurer, your age and the cover you’re comparing.
What you’re getting in return is more certainty over the future cost. With a reviewable or age-banded policy, you may pay less initially but have less certainty about what you’ll be paying later.
For more information on premiums generally, read our guide to how much executive income protection costs.
Can the premium rise after you make a claim?
Making a claim does not usually increase the premium on a guaranteed policy.
A reviewable premium can still change at a scheduled review, but not simply because you personally have made a claim.
For more information on what happens when you claim, read our guide to making an executive income protection claim.
What if you increase your cover later?
A guaranteed premium applies to the cover you originally arranged. It doesn’t mean you can substantially increase your monthly benefit years later and pay the original price for the extra cover.
If your earnings have gone up and you want more cover, the additional benefit may cost more because you’re older when you add it. Depending on the policy, the insurer may also need to look at your circumstances again.
This is particularly relevant to directors whose salary or dividends increase as the business grows.
For more information on how director remuneration affects the cover available, read our guide to salary vs dividends for income protection.
You can also read our guide to increasing your executive income protection cover.
What about inflation-linked cover?
You can sometimes choose for the amount of income protection to increase over time, so the benefit doesn’t gradually lose value as prices rise.
If your insured benefit goes up, the premium will normally go up with it.
This doesn’t necessarily make a guaranteed premium reviewable. The increases can be built into the policy when you take it out.
If you’re considering increasing cover, check how both the benefit and the premium will change over time.
Which premium structure is better?
If knowing roughly what the policy will cost in ten or twenty years is important to you, guaranteed premiums have an obvious advantage.
Reviewable or age-banded cover may cost less initially. Whether it works out cheaper over the years is another matter.
When comparing policies, look at what you’re paying now, how that price can change and how long you’re likely to keep the cover.
You’ll also need to compare the cover itself, including the monthly benefit, deferred period, benefit period and definition of incapacity.
For more information on two of these choices, read our guide to income protection deferred periods and our comparison of short-term vs long-term income protection.
Check how the premium can change
Don’t compare policies on the first month’s premium alone. Find out whether the price is guaranteed, reviewable or age-banded, and what could happen to it in future.
A lower starting premium can be tempting, especially if you’re unlikely to keep the policy for decades. But with reviewable or age-banded cover, what you pay later could be quite different.
A specialist IFA can answer your questions and compare the premiums, cover and terms available from leading providers.