Insurance Premiums Are Super-Rational

Every insurance policy is a package of promises. Benefit, guarantees, options, limits, and more. Any of their type will cost the same.

All life insurance costs the same.  That does not mean that all premiums are the same, but rather that the things that are included in pricing are the same for each insurer.  You can use that information to help you see opportunities. Maybe you don’t need all the pieces in the package.

With life insurance the factors that matter are:

  1. Likelihood of dying.  Insurance companies get medical and other information because the pool of healthy people who are are living low risk lives is easy to predict.  Almost none die immediately.  The probability of a healthy 30-year-old male non-smoker dying in the next 12 months is tiny.  Around 100 in a million.  The odds of him dying in the next fifteen minutes is well less than the odds of winning a super-lottery.
  2. The value of money.  Insurers invest premium with a view to paying off , on average, some day in the distant future.  Interest rates matter.  Most level premium insurance has risen in price dramatically over the past 20 years.
  3. The insurer’s expenses.  There are several parts to this.  Commissions which are almost unchanged, medical and other underwriting which have risen if anything, and clerical administrative which has fallen significantly.
  4. Taxes and other charges.  These have risen a little in Canada but are not a material factor when compared to other things.
  5. The rate of lapse.  The idea of premiums is to build a reserve to meet the eventual claim.  If someone quits they will usually take away less cash than their reserve.  Insurers or participating policyholders win what these people lose.

No insurer has an advantage compared to the costs involved.  They are all interest rate takers and variations in underwriting provide minuscule advantage. Costs and taxes are not enormous and not variable by much.  Lapse is interesting and it provides some insight to why the market offers different premiums. If you have staying power, with some policies, you can win what others lose.

In general, the reason premiums are different for what looks like the same thing is that the package of promises is different.  Premium make sense if you notice the pieces.  If the price is lower, you will get less from the insurer.  No question.  Actuaries know what they are doing to the fifth decimal.  Price is not indicative of value.  If you don’t know what is missing to make the price lower, you can be adversely surprised.

Consider disability insurance as a N opportunity.   The price is gradually rising for a reason.  Things that used to kill people now merely make them disabled.

Heart surgery is nearly an outpatient treatment for some cases.  Many cancers are treatable.  Few die from pneumonia any more, even when it is a byproduct of some other disease.  Morbidity costs go up as opposed to mortality costs that go down.  Buying guaranteed rate disability insurance is a strong tactic.

Money solves problems or at least makes them easier to bear.  Be sure you have taken a serious look at critical illness insurance. Those who have had claims have found it surprisingly useful. 

It may be true that things that do not kill you, make you stronger, but few of them make you financially stronger.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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