As
we've discussed in more than a few
articles, term life insurance has really
become somewhat of a commodity. Just
like rice, or corn, or aluminum, this
should tend to make the marketplace more
transparent and bring variability in
rates down across the various carriers.
Indeed, this has happened and it's been
accelerated by the internet and the
ability of shoppers to price shop many
term life plans and carriers side by
side. All in all, it's been a very good
period for term life shoppers. That
being said, when you run a standardized
quote (say $250K for 10 years base on a
given demographic mix of age, area, and
gender), you'll get different rates from
the life insurance carriers. Some may
be only a few dollars apart but if look
at the lowest versus the highest rate
given, it can be 20% swing. What
gives? Why are some more expensive and
are those plans offering you additional
benefits that don't immediately make
themselves clear when running the
quote? Good questions. Let's take a
look at why term life insurance rates
quoted online are different from each
other.
The
term life product really is fairly
simple and there's not a lot of
differentiation to be found in the core
product. Why would one company's rate
be 10% lower or higher than another
company's rate for the same exact
product design (say $250K at 10 years)?
There are a few variables that come into
play...some of them legitimate and
others less so. First, a term life
carrier will price it's plans based on
three core variables: claims
experience; it's derivative - claims
expectation; and desired margin over
expense/reserves. Let's look at each of
these and see if there's a hint to our
original question of pricing
variability.
It's
not uncommon to see a carrier tighten or
loosen underwriting (the front end
qualification process based on health)
depending on how claims come down. Each
carrier has a model of what they think
claims will be. These are sophisticated
mathematical models aimed to project
mortality based on given health and
demographic make-ups. If a company
over-shot and were too conservative,
granted this may be good in that their
claims experience was low but they also
lost business to other carriers
(potentially good, low-risk) business by
being priced too high on the market.
You might see their pricing stay the
same or reduce for new business going
forward into the next cycle. The
opposite is also true, they may have
underpriced their product based on
faulty models The knee jerk reaction
can overshoot any middle ground and lead
to higher premiums into the next pricing
cycle. So these two variable result
from the fact that pricing life
insurance is an imperfect science owing
to the variability of people. That's
not going to change.
There
are also business strategies that might
push a given company's term life
insurance rates (maybe even on certain
term periods and amounts) higher or
lower. For example, a carrier might
offer longer term periods but really
doesn't want to be in that segment of
the market. They might price their
plans higher figuring...if we get
customers at that higher rate than fine
but we don't really want to pursue it
aggressively. On the the other hand,
a company may really like the
risk/reward probability of certain
amounts and periods which leads to a
more aggressive pursuit (via rates and
marketing) of those term life markets.
The company in general may want to "buy
the market" by under-pricing plans in
the short term to generate additional
revenue. There are all sorts of reasons
for the pricing variability, very few of
which have any concrete effect on the
shopper with one caveat. You want to
make sure that the life insurance
carrier is financially stable with a
long track history. If that's accounted
for, go with the lower priced plan and
leave the variability to mathematicians.
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