Within the Life Insurance Industry, it has long been known that Life and Critical Illness Insurance (CI) costs would rise, and unfortunately for the consumer, permanently.
The economic realities that we are all facing, as individuals and global citizens, have affected the ability of insurers to continue to offer historically favourable rates and product features, for permanent insurance.
The enduring low interest rate environment has reduced margins and as a result the insurers ability to offer the same level of competitive pricing. We have seen unprecedented permanent life insurance price increases, which are likely to continue for months.
Insurance companies rely on the very profitable ‘term’ insurance. Statistically, there is a very small likelihood that term insurance policies will be claimed given that people tend to cancel their policies as premiums ramp up upon the renewal of each term – i.e. ‘Term 10’ locks in premiums for 10 years and for owners to renew for an additional 10-year term, costs escalate. When policy owners enter their thirties and forties, the costs escalate rapidly.
In most cases, term insurance contracts also expire (without the option to renew) between the ages of 75-85, depending on the insurance company. For short to mid-term needs, term insurance can be cost effective, however for the mid to long term it is inefficient.
For example, a healthy non-smoking Male age 50 takes out a $500,000 life insurance policy to protect his wife and children should he pass away prematurely. His death would result in the loss of his income and savings from that income. Assuming that his age of passing was 85, here is an illustration comparing ‘Term’ with ‘Permanent’ insurance premiums:
Term 10 Life Insurance – renewable to age 85
$860/yr for the first 10 years $7,105/yr next 10 $19,455/yr next 10 $52,800/yr next 5 (to age 85)
TOTAL PREMIUM OUTLAY FROM AGE 50-85 = $581,256
Permanent Life Insurance – Level and Locked in rates for Life
$5,520/year to age 85
TOTAL PREMIUM OUTLAY FROM AGE 50-85 = $193,212
Initially people looking at the pricing in this very common scenario would say $860 vs. $5,520 seems crazy for the same $500,000 policy face amount. However, when you look at matching the right product with the need, sometimes the best and by far most cost effective solution is not what initially appears obvious. When crunching the numbers and looking longer term at the bigger picture, the opposite surprise generally holds true.
A total premium outlay to age 85 of $193,212 (for the Permanent Life Insurance) vs. $581,256 (for the Tem 10 Life Insurance) is dramatically more palatable for anybody, over time.
The other very significant reality of these two scenarios is the fact that if I had made the notional year of passing one year later i.e. age 86, the term scenario would NOT have paid out the $500,000 face amount at all. The reason being that the expiry date on this term policy is age 85 (which is just about the latest expiry possible on a term policy). At age 86, 96 or beyond, the permanent policy would still payout the $500,000 face amount.
No wonder that insurance companies enjoy ‘Term’ sales over ‘Permanent’. Industry experience and statistics bear out the fact that fewer than 2% of term life policies ever pay out; a big boost to an insurer’s bottom line.
The window of opportunity on pricing is rapidly declining.
Our very experienced insurance team would be happy to sit down with you (and your spouse) to do a full, no obligation review of your current insurance coverage. We would look at your existing needs both now and going forward. Taking into consideration what would be the most cost effective and tax efficient solutions, to protect you and your family.
Written by Josh Tward, Director of Insurance Operations