Everyone likes a deal—when laundry detergent is on sale, you stock up because you know eventually you’ll need it. The same could be true of life insurance, and your client could benefit from a volume discount by buying more.
Cost of insurance calculations can sometimes produce a “club pack” discount effect. Not only could a larger policy cost less per $1,000 in coverage, but it could also carry a lower overall premium.
Insurers use the term banding to describe the process of structuring coverage and pricing levels. The cost per $1,000 of coverage within a band decreases at the next higher band, making it more economical to buy greater coverage.
In some cases, your client could buy $500,000 in coverage at a lower premium than $400,000 in coverage.
The table below shows four situations in which a $500,000 Term 20 policy costs less than a $400,000 Term 20 policy. The results come from LifeGuide Professional Software and are based on a standard-rated 30-year old female non-smoker.
In the fifth case, the increased cost of the higher policy is negligible. In all cases, an intermediate amount—$450,000—costs more than the $500,000 policy.
For the aforementioned client, the cost per $1,000 within the $250,000 to $499,999 band is $0.80 at Sun Life, while the cost in the band starting at $500,000 band falls to $0.61.
There are costs associated with every policy, regardless of the size. Industry executives liken the annual policy fee to a shipping charge covering the cost of delivering the product.
“It’s the annual cost of covering the administration of the policy, changes in terms of statements, that type of thing, as well as an amortization of some of the fixed underwriting costs,” says Paul Fryer, president, individual business management, individual insurance and investments, Sun Life Financial Canada.
Carriers may reduce these fees as a “policy-fee sale” rather than reducing rates, explains Maria Winslow, senior manager, mass market life insurance and living benefits at RBC Insurance. But these “sales” are increasingly rare.
“The last time we did a policy-fee sale was end of calendar year 2004 and start of 2005. But we haven’t done one since,” she says.
RBC Insurance provides a kind of two-for-one arrangement on policy fees. When a client applies for both a term and critical insurance bundle, RBC will waive the second policy fee, Winslow says. “So that’s not a sale; it’s a standing bundle that we offer,” she explains.
Using reduced costs on policy fees as a sales incentive works differently between insurers. They often reduce or eliminate it in situations involving more than one insured life, according to Lorne Marr, president and founder of Markham-based Lorne S. Marr Insurance Services Ltd. “Most insurers allow savings on multi-life arrangements,” he explains.
In a multi-life situation involving two spouses and a child buying SunTerm insurance, for example, the first spouse pays the full policy fee, the second one gets a 50% reduction on the fee and the company waives the fee on the child’s policy.
Apart from simple volume-pricing, carriers may offer lower premiums because of the reduced underwriting risk associated with higher-value policies, according to Winslow.
“You’re better able to assess your underwriting risk,” she says, referring to the greater testing at higher levels. “The better we can assess your risk, the cheaper your rate.”
Given the lower price for more coverage, is there a risk to the advisor who does not up-sell the client? A beneficiary who feels the death-benefits payout could have been higher when the insured dies may be tempted to argue the broker should have sold the higher amount.
They would not likely have grounds for a serious legal complaint, as there is no contract between broker and beneficiary, according to Ed Rothberg, former general counsel to Advocis.
Among common law provinces, The Insurance Actgives the beneficiary standing to enforce payment of death benefits when the policyholder dies, but not the right to demand extra payment or to lodge a complaint in the absence of higher payment. Rothberg adds the executor of the deceased’s estate might sue the broker for negligence, but would probably not be successful, according to current standards of a broker’s responsibilities.
Figure. 1: This table shows premiums at standard rates for a 30-year-old female, non-smoker for T20 insurance and demonstrate the effect of volume pricing and more detailed testing during the underwriting phase.
|Canada Life Assurance||$316||$353||$300|
|Equitable Life of Canada||$298||$329||$295|
|Sun Life Assurance||$345||$385||$330|
NB1: The similarities in cost between a lower amount of coverage ($400,000) and a higher amount ($500,000) are not consistent within insurers’ pricing structures and between insurers. Each case requires individual examination.
NB2: The similarities in premium pricing do not occur in this fashion with all insurers.
Source: The LifeGuide Professional Software, produced by CompuOffice Software Inc.
If increasing the policy amount is not in the cards, there are other ways of cutting your client’s cost of insurance.
The most convenient method of reducing your client’s insurance bill is for them to pay annually. Paying on monthly instalments usually costs roughly equivalent an extra month’s payment, Marr explains.
At RBC Insurance a 40-year-old male non-smoker getting $250,000 in coverage on a Term 10 policy at standard rates would pay $240 annually, or $20.70 monthly for a higher annual cost of $248.40.
Most carriers use the “age-nearest” method for determining the clients age in the policy. If the application is made more than six months since the client’s birthday, they are considered to have reached their next birthday.
Backdating a policy date has a financial upside and timing downside. Where the insurer allows backdating, the premium may be calculated at one year lower, generating both an immediate saving and an annual saving on the differential between applicable premiums.
Backdating also means that the individual pays for coverage after the fact since he or she was not covered from the date determined by backdating. Moreover the premium becomes due annually on the earlier date.
Union Life Insurance of Canada allows up to 30 days backdating only on a case-by-case basis, depending on factors including its relationship with the broker. Canada Life Assurance allows backdating up to 11 months on all of its life insurance products. Between these two extremes, RBC Insurance and Empire Life allow backdating of up to six months while Sun Life allows up to three months.
Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.