inkwellWhy are some Insurance Protection Plans cheaper than others?

Insurance Contracts of the person, typically issued by life insurance companies are usually long term contracts lasting many years or for a life time, as apposed to property and casualty insurance which is almost always for a 1 year term, at which point it is renegotiated for successive 1 year period.

This long term nature of insurance of the person, (life insurance, critical illness, disability etc) makes it more important to understand the terms, conditions and benefits of the coverage, so you know what you have and what you don't have as protection.

Always remember: "You get what you pay for."

But more importantly "Know what you got."

The Benefits are not the same.

The Expenses are are not the same.

The Guarantees in the contract are not the same.

  • The Premium
  • The Length of Coverage
  • The Definitions of Conditions covered.
  • The Validity of the Contract Agreement
  • Flexibility of YOUR choices in the contract.
  • Flexibility of INSURER's choices in the contract.

The Benefits

Important to be comparing Apples to Apples. Like in a Critical Illness plans, Bank Plans cover four conditions, Full coverage can be up to 24 conditions.

How many conditions are covered?

Do you have 24 hours of protection, or just on the job?

Are all causes covered or just accident? 

The Expenses.

If the expenses are lower, the price can be lower. How can they be lower? Some plans take your health an other insurablility answers on your application for coverage and check them out with tests, and reports from your doctor, MVR reports about your driving, etc. Others accept your broad statement that you are a good risk in the form of one or two questions or statements and issue the coverage. If you claim, months or years later, then they pull out the application and begin to take a closer look do some investigation and if they don't like what they find, like you ommitted to mention this and that; They deny the claim and cancel the policy. This way only a small number of investigaton expenses have to be incurred. All the investigation expenses of the plan holders that didn't claim are not incurred. This is called Post Claim Underwriting. With quality contracts, they ask a lot of questions, do the testing, and make the inquiries in the beginning and if they don't like something, they deal with it then not years later. Contracts that practice post claim underwriting can provide you with a sense of false security. Bank Mortgage, Credit Card Protection, and Emergency Travel Health Plans fall into this category.

The Premium

If the premiums are NOT guaranteed and specified in the contract, and can be adjusted upward (rarely are they adjusted downward without changes in the coverage), then the premiums can be cheaper to start with.

Here is an example of why life group premiums are cheaper than individual plans.

If you compare a groups of individuals of say of 100 people, all employer at thesame firm.  They all had $25,000 of employer group life insurance.  Now assume all those same employees had $25,000 of individual life insurance they bought from their insurance advisor the day they joined the company.  You wouln't be surprised if I told you that the individual policy is cost more than the group premium. Here is why, individual policies, underwritten up front when you buy them, are portable, not cancellable by the insurer.

Over a period of time, every year typically the premium on the group insurance goes up. By the end of the say 5 years, 25 people have left and 25 new people have come on board and are new and different. This keeps the pool of people in the group, from an insurance viewpoint, fresh and more healthy than the original group. The 25 that left are probably going to be older as a group than the 25 replacements. The 25 that has left, lost their group insurance but still have  their individual coverage, whose health as a group has certainly deterorated by age and time, yet the insurer is still on risk for te individual policies. In the group policy, this constant remixing of members with younger and healthier lives allows the premiums to be lower.

 

Type of Underwriting

Traditional insurance of the person is underwritten when you purchase the plan and the insurer either accepts you as applied for or changes the benefits and the premium basis under which it will issue; alternatively it can decide that it does not wish to give you converage under any basis. So you know right from the start that you have coverage or not. Some plans are underwritten at claim time. This is called "post-claim" underwriting. This is done to keep costs low to the insurer and the consumer. This can have undesirable consequenses. Bank mortgage insurance is often handled this way. To get details on this check out the page on "post-claim" underwriting and mortgage insurance.

The Coverage

The length, the conditions of coverage between two plans may be different. Remember the older on gets the greater risk of something you might claim for, so if the coverage ends before those things are likely to happen, statistically, the cheaper the rate can be. Just compare the cost of a 10 yr term life insurance policy in th efirst year of coverage at age 35 and the first renewal in the 11th year at age 45, significantly higher.

Mortgage Insurance at the Bank has a coverage period equal to the length of the term of your mortgage, 1 to 5 years, then it is renegotiated.

Group insurance is in effect while you are in the group, ie. employed at the firm. It is typically not transferrable when you leave.

The shorter the coverage the more opportunity for the insurer to change the premium and may be relook at your insurability. Its another way of NOT guaranteeing the premium.

Some plans not only the remium be increased if claims experience is bad, but the the coverage can be cancelled for a whole group of people, maybe by geography, like Ontario, or by occupation, like certain health care workers. The more flexibility the insurer has the cheaper the premiums possible.

Validity of the Contract.

This issue goes back to the core of the reason for the purchase in the first place. You buy insurance for the "peace of mind" knowing that you have a financial backing in the event you can't provide the necessary financial support caused by certain evens. Hence the insurance. Now, if there is a question of whether the contract is valid and that issue is not resolved until there is a claim, as in Post clam underwriting, then where is the "peace of mind"?  Most individual insurance contracts are underwritten at time if issue not claim. If its not the case be suspicious.

The notable exception is Emergency Travel Health insurance commonly referred to as Out of Country Travel. Most people buy this at the last minute with their airline or holiday package booking, so underwriting at issue is problematic as a matter of practicallity.

Cheap Vs Inexpensive

The reason for cheap is described above. Inexpensive is defined as the lowest price among a group of offerrings that are the same  as to duration, coverage and benefits. Inexpensive Term insurance rates are for new purchasers vary frequently and we routinely check the market for the most competitive plan in the market.~

 

 


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