Have you ever heard of bands in regards to life insurance?
Well it’s true. There are premium bands that almost all life insurance companies use. This creates pricing issues that you might never be aware of. A good insurance professional should be aware of this but not always. They make mistakes. These bands will vary by the type of policy as well. I will tell you that they are most prevalent in term insurance policies. If you have or plan on purchasing term insurance it is something you need to be at least aware of because your agent might not be.
What life insurance companies do is they band premiums by policy size.
An example of banding would be:
- band 1: $100,000-$249,99
- band 2: $250,000-$499,999
- band 3: $500,000-$999,999
- band 4: $1 million and above
What this means is that the premium per $1,000 of coverage decreases as the amount of coverage purchased moves into the higher bands. The way in which life insurance companies band premiums may vary as this is just an example.
Premium bands are like break points.
Most people are more familiar with mutual funds. Think of premium bands as break points. With ‘load’ funds you, the consumer, pays a sales charge usually at purchase. The most popular and widely used ‘load’ funds are called “A” shares. These have the highest upfront load with the lowest annual expenses. The typical upfront load for “A” shares is 5.75% of the purchase price. As you buy or own larger quantities of “A” shares within a mutual fund family you get a discount, or reduced load.
Life insurance companies work much the same way. As you purchase larger amounts of insurance you qualify for reduced. However, life insurance is not as clear cut as mutual funds in that premiums within each band vary by gender (male/ female/ unisex), issue classification, issue age and policy year.
What does this all mean?
What this means is that if you are nearing a band then it will most likely be cheaper to purchase a larger amount of insurance. From the example of bands above, it is probably cheaper to purchase $100,000 of coverage rather than $87,000. It is probably cheaper to purchase $250,000 of coverage than $229,000.
Consumer Awareness
This can be important to be aware of depending on who you are working with to place the insurance. Let’s say you go through a calculator to determine your amount of coverage. If the number you come up with is not a round number, such as $962,000. When you decide on a company which to apply to for your life insurance it is important to understand where their bands are. If they have a band at $1 million of coverage then it will most likely be cheaper for you to purchase $1 million of coverage.
The Problem
When shopping for insurance online, it is probably best to round your coverage amounts up so as to try and catch the next band. If you put in a non-round number for your amount of coverage you will most likely get a quote that is that exact number even if it is more expensive coverage. Unfortunately, not all quoting systems account for premium banding. This means that the person running the quote, or the agent, needs to check to see if the insurance can be cheaper for you.
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Very good points. That’s why getting quotes from real life insurance experts with enough knowledge and flexibility to show these options is best – even when you’re shopping for life insurance quotes online. Premium bands can also be quite different with different companies, so getting multiple perspectives can be important.
@Aaron
I couldn’t agree more with you. If you are shopping online, you should definitely check out Aaron’s website. Real people helping you by competing for your business.
When you say cheaper to purchase $87,000 than it is to purchase $100,000, do you mean that you will actually pay less out of pocket for the $100,000, or rather do you mean that the premium you pay per dollar coverage is less?
Ace of Wealth´s last blog ..Credit Score – What’s Your Number?
@Ace of Wealth
I mean you can actually pay less out of pocket. Actually I guess I mean both. This is how banding works. I just ran a quote that had $250,000 of coverage for a lower annual premium than $229,000. The other day I ran a quote where $500,000 of coverage was a lower annual premium than $478,000. If you have someone running the numbers for you they might not check what the bands are for that particular company and as Aaron stated above they can vary quite a bit.
You make a great point about the “bands” of premium costs. Both my wife & I have $1MM term policies. I hope we hit the next band, but didn’t think about it at the time of purchase. If we ever add more insurance I’ll keep it in mind.
Jason @ MyMoneyMinute´s last blog ..There’s An App For That: Credit Card Interest Rates
@Jason
At $1 million of coverage you most likely hit a band there. If you had $982,000, then I might be worried. Thanks for the comment.
So, according to your figures could a 100K policy cost more than 250K?
Ken´s last blog ..Weekend Roundup
@Ken
No. The cost of insurance would be less per $1,000 of coverage but that is too wide of a gap to cost more overall. What I’m saying is that as you get close to a band it might cost you less to go to the next band. So $250,000 could easily cost you less than $240,000. This would be because you are right near the next band.
An example of this would be from my bands above, in band 1 the cost might be $5/$1,000 of coverage. So $220,000 would cost you approximately $1,100 per year. In band 2 the cost $4/$1,000 of coverage so $250,000 of insurance would cost you approximately $1,000 per year. (I just made this example up to, it is not actual numbers.) Does that explain it better?
Yes..that makes it clearer…Thanks
Ken´s last blog ..Weekend Roundup
Very insightful post EOW. I love learning about insurance and all its nuances.
Let’s say one had liability of $5 million, and a net worth of $10 million. How much life insurance would you get if the spouse doesn’t work?
Financial Samurai´s last blog ..How To Get Your Super Motivated Boyfriend to Marry You
@Financial Samurai
Why such a vague question? There would be so much more to the situation than just this. You should always start with the purpose…
Just for fun I’ll give you the answer…they should insure their human life value.
Didn’t realize my question was vague. OK, what if someone had liabilities of $5,238,875, but a net worth of $10,808,500, and a spouse that doesn’t work?
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Is the amount of insurance only determined by net worth? You might factor in liquidity, income replacement, college or kid expenses, etc. It goes back to the purpose of the insurance. Or maybe I’m just not a good enough salesman?
My advice would be to insure his human life value
http://evolutionofwealth.com/2009/12/what-is-your-life-worth/
Something else to think about is why someone with that type of net worth would even need life insurance. It’s possible that they wouldn’t for income replacement, college funding and so on. There are probably other reasons like business continuation, charitable giving, estate equalization, and maximization.
It’s also very likely that the individual wouldn’t want to own their own policy as it would cause an adverse tax situation if they die in any year besides 2010 (as the law currently stands and assuming no state death tax). So not only would the amount of life insurance be discussed, but the proper ownership would be an important part of the plan to keep the value from eroding at death (ironically, that’s the time it is worth the most). But this sort of stuff doesn’t apply to most people.
Yes, If a salesperson responded to be asking why I’m being so vague, providing this kind of detail, I would probably thank him and go somewhere else.
With this kind of income/assets/liabilities, I would expect the salesperson not to keep asking me a question with a question. Instead, I’d like the salesperson to respect my privacy and present scenario analysis from which I can choose from.
i.e.
1) With $5 million in liability, you may consider at least a $5 million policy, but let’s talk about the cash flow involved in funding that debt and the ability to sell off your assets to fund that debt.
Aaron, provides some good for thought below.
The last thing I want is a runaround by the salesperson.
Best,
Sam
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Financial Samurai:
Well first off I never claimed to be a salesman. I’m confused to why you would think asking question is the ‘runaround’. Aaron does a great job of making my point. There are a ton of other factors that come into play when you talk about purchasing life insurance. I would argue that someone with that high net worth and liabilities needs life insurance more than most people. You don’t want questions about specifics then in your example you bring up cash flow. Isn’t that a question attempting to be more specific?
To me life insurance is not a standalone decision. It can have a huge impact on someone’s financial situation and decisions regarding it should NOT be made regardless of specific and full financial situation.
If someone came in being as vague as you and refused to talk about it, I would happily let them go somewhere else.
Sounds good. Good thing you’re not an insurance salesman then!
Most people with higher net worth’s are aggressively private about their finances. They’d like to be presented with choices, and then decide. Sales is definitely a fine art where you’ve got to push, but not push too hard. It’s a tough jobb for sure!
Best, Sam
Financial Samurai´s last blog ..How To Get Your Super Motivated Boyfriend to Marry You
Good thing huh?
From my experience, “aggressively private” is a little strong. The high net worth people have a great sense of value. They see the value in and understand the importance of fixing a problem at it’s source. As much of take charge type of people they usually are they don’t want to deal with the nuances of things. As much as they don’t like to waste time they seem to have a lot of respect for people that know how to ask the right questions.
Sounds like you’ve studied sales quite a bit. Are you speaking from experience?