This article from a recent Partners Life publication raised my interest. I thought it would be useful for you to read.
Ever wondered how we arrive at that premium you pay for your insurance? Here’s an overview of what’s involved.
The premiums you pay cover the costs of your insurance, from setting up and maintaining your policy, to paying your claim if you need to make one. Setting premiums is a complex business.
We consider many issues including the type of cover you want, your risks, and our costs. It starts with you.
The first component of your premium, the underlying premium, is calculated on your personal demographics. We look at factors such as your age, gender, occupation and smoking status, and the size of the protection benefits you have bought,
such as life, trauma, disability, business or medical benefits. This sets the underlying premium for your policies. You pay the same underlying premium rate as other clients in your demographic.
This covers the costs of issuing your policy, such as underwriting, application processing and reinsurance. It also covers the costs of maintaining your policy, including claims administration and day-to-day service, and the external costs such as
the commission we pay to your adviser.
We also build a profit margin in so we remain a vibrant viable business that can deliver on its commitments to you.
Your risk profile Secondly, your premium may also carry a loading for risk based on your individual health, occupation, and recreational interests. If you are twice as likely to claim on your income protection policy as another client in your demographic, your premium will reflect that.
If you are a 40 year old commercial fisherman, for example, you are a smoker, and you spend your weekends trail bike riding, the statistics suggest you are much more likely to make a claim on your risk policy than a 40 year old non-smoking accountant who gets all his exercise at a gym.
Other factors will also increase your risk. If you are overweight and you come from a family with a history of heart disease, for example, then statistically we know you are more likely to make a claim than someone of normal weight who doesn’t have that family history.
If our underwriters think you have a greater risk of claiming than the general public, they will add a loading to your premium.
Premium loadings can be reviewed and may be reduced or removed if a client’s risk profile changes. Give up smoking, for example, and in time, your premium loading may drop.
Then there’s loyalty… The third component of a premium is your client loyalty discount. This starts after you have been
insured with us for two years. After two years, your premium is discounted by 1%, and by an additional 1% on each anniversary until you have reached the 10% maximum. This 10% discount then applies for the life of the policy.
Fixed fee Finally your premium will include a policy fee. This is applied to all our customers with the same type
of policy, at exactly the same rate. This covers our fixed corporate costs. If these costs change, the policy fee can also change.
How you pay Your premium structure for Medical, Income, Mortgage Repayment, Household Expenses, Premium, Life Income and Business covers is a yearly stepped. This means every year on your policy anniversary your underlying premium
rate will be recalculated based on your age, any changes we may have made to our overall underlying premium rates and any cover increases.
For most of us, premiums are likely to increase on each anniversary as we get older and our cover levels increase. Some premiums will remain largely unchanged, or even reduce. Men aged 25 have a lower underlying premium rate for life cover than men aged 24, for example, because as men get older their risk of accidental death reduces. If you are entitled to a loyalty
discount, this might be enough to cancel out the cost of your age increase in some years.
Premium structure options For our personal lump sum benefits such as Life, Trauma, and Total and Permanent Disability covers, you can choose a yearly stepped or a 5% stepped premium.
The 5% stepped structure guarantees that for each 10 year period your underlying premium rate will only increase by 5% on each anniversary date. CPI increases and client loyalty discounts will still apply on each anniversary but age related
changes and any changes to our underlying premium rates are included in the fixed 5% increase. This provides budgeting certainty and is especially useful if you know you will need the types and levels of cover you have chosen for at least 10 years.
But if you cancel your covers during a 10 year period, you could have paid significantly more for the same cover than you would have if you had chosen the YRT premium structure.
For Life Cover you have two additional choices. You can choose a guaranteed level of cover to age 65, or to age 80. Your underlying premium rate will not increase for age or if our premium rates rise, Your premiums will only increase if you
increase your cover amount before the specified age. This provides budgeting certainty and is especially useful if you know you will need the types and levels of cover you have chosen for the long term. But if you cancel your covers at a
selected age, you could have paid significantly more for the same cover than you would have if you had chosen the stepped premium structure.
Finally our new Funeral Plan has its own unique premium structure. The underlying premium rate is guaranteed for life (no client loyalty discounts apply to this policy). The premium you pay can only change if you change the sum assured or if we change the policy fee.
It is important to remember if you have one of the guaranteed premium structures on your policy when comparing your premiums with others on offer. Because guaranteed premiums are smoothed over time they’ll probably look more expensive than stepped premiums for the first few years, and cheaper than stepped premiums later.
What happens if I don’t pay? Once you have missed your premiums for the equivalent of one month your policy may lapse and you will no longer be covered. We don’t want that to happen.
If you have a crisis that leaves you financially stretched, such as a family bereavement, redundancy or serious illness, talk to us. We will look at whether we can offer you options, such as a premium holiday, while you get back on your
feet. We can even look at a premium suspension if you’re going to be off work for a few months. Just give us a call and we’ll see what we can do.
If you have any thoughts or opinions that you would like to share, visit us at our Twitter, Facebook or Linked In pages, and comment.
For more blog articles on insurance, check out these posts:
If you want to make sure you have the most appropriate insurance cover for you – Get a Free Quote Now
By Paul Swarbrick