Why is it that different companies charge different life cover premiums for what is essentially the same product? With life assurance, the ‘product’ is an assurance that an agreed sum of money will be paid to your estate if you die during the term of the contract. Once you have an understanding of the different elements that make up the total cost, it becomes clearer.
The first element in the equation is mortality rates. In other words, the number of people in a given demographic that can be expected to die in a given period. Mortality tables are fairly standard with life assurance companies, tending to use the same basic numbers. As an extreme example, 100% of people aged between 20 to 40 in the UK can be expected to die within the next 150 years. But what about the next 10 years? There are many factors that will influence this, including current health, family health history, occupation, lifestyle, gender etc. If we look at a group of 100 males aged 39 who are overweight, smoke and in a stressful occupation, it would be fair to assume that more of this group will die in the next 10 years than a group of 25 year old female aerobics instructors. Historic analyses of these demographics result in the life insurance company’s mortality tables that are used to assess the risk. The application forms for life assurance ask lots of questions that are designed to determine which category you fit into rather than assess your individual mortality rate.
The insurance company will publish a standard premium for all males aged, say, 30 years old but will apply a ‘rating’ if their occupation or medical history, for example, puts them into a higher risk category. This rating only becomes known to you after your application has been assessed by the life insurance company underwriting department. Although underwriting should be fairly standard, in practice some life assurance companies can be stricter than others when assessing certain risks. Independent Financial Advisers will have experience of the underwriting criteria for different companies and are best placed to recommend suitable products if your personal circumstances are not ‘standard’. Occupational ratings in particular can vary significantly between life insurance companies,
The expenses of the life assurance company are an important factor. One of those expenses is the cost of marketing their products and will include advertising and running a sales force for example. These costs can be substantial and are built into the premiums of the life assurance products. Companies who distribute their products via Independent Financial Advisers will tend to have lower direct marketing costs than those companies who deal direct with the public. They tend to compete on a cost basis leading to lower premiums. The ability of the company to have efficient administration and the optimum number of staff dealing with the applications and claims will be reflected in the premiums charged. Commission paid to advisers who recommend the products, varies between companies and this is a further cost to be built into the final premium.
In summary, the price is made up of the basic cost due to mortality rates plus the operating costs of the provider, plus the costs of any advice. So if we take advice out of the equation, will you save money? Possibly, but those companies marketing their products without advice will have higher marketing costs which will offset the removal of the cost of advice. Without advice you could find that the product is not the most appropriate to your individual circumstance. In the next article, I will explore the question of advice and whether it can add value.