What are my life insurance premiums made up of?
Have you ever wondered how an insurance company comes up with the cost of your cover?
The premium for your cover is based on actuarial statistics, or data that is gathered, compiled and studied by an Actuary.
What's an Actuary you may ask?
Someone who deals with the measurement and management of risk or uncertainty. In the insurance industry, an Actuary is responsible for analysing the possible outcomes of the types of events that could potentially result in claims.
The more likely you are to claim, the higher your premiums will be. This is the life insurance version of “user pays” and helps ensure that the widest possible mix of both healthy and not so healthy clients are attracted to buy insurance, so that the collective risk of claims can be spread amongst this wide mix of clients.
While In New Zealand, the Human Rights Act 1993 protects individuals from discrimination on the basis of age, gender and disability, the Act does provide a specific exception for Life Insurers.
Life Insurers are allowed to price differently on the basis of age, gender and disability provided that this different treatment is supported by actuarial or statistical data, clearly showing different risk profiles for people of different demographics. If no actuarial or statistical data is available for a particular demographic (for example, an individual with a very rare combination of diseases or disorders), pricing based on expert medical opinion of the risk is also allowed.
The easiest way to understand this is to look at a few examples:
Life cover is priced based on an individual’s risk of dying in a particular year, regardless of the cause. In most cases (unless clients have taken out recommended level cover), premiums would be expected to increase each year as an individual grows older and becomes increasingly exposed to certain life threatening diseases.
However, in the case of young men between the ages of 20 and 35, premiums actually go down year-on-year. This reflects the decreasing risk of accidental death over this age range.
Trauma benefits are priced for an individual’s risk of suffering from one of the covered conditions in any particular year. In younger age groups, the risk for both males and females are fairly similar, which means premiums are fairly similar for both genders until around age 45.
After this age, the risk of a male suffering a cardiovascular event such as heart attack or stroke becomes significantly higher than the equivalent risk for a female and Trauma premiums, therefore, become more expensive for men than women from that point onwards.
Monthly disability benefits like Income Protection and Mortgage are priced based on both an individual’s risk of making a claim and the likely duration of that claim.
While the overall number of claims made by each gender are reasonably similar, the average duration of claims for females tends to be higher across all age groups, which leads to higher premiums for women on Income Protection products than men.
This difference might be explained by looking at most common claim causes amongst each gender. Short-term accident related disability claims are higher for men, while longer term claims such as those arising from mental health are higher for women.
This does not necessarily mean the incidence of mental health conditions are higher amongst women, perhaps it is because women might be more likely to seek medical help and take time off work to recover fully.
While this does mean that Income Protection is more expensive for women as a result of the longer average claim duration, it might also explain why other products such as life cover are relatively cheaper for women than men i.e. seeking medical assistance and taking time off work to recover may ultimately lead to a better health outcome in the longer term.
The principal of insurance is that we pay regular premiums to an insurer so that if and when an unexpected, significant health event occurs which could have a catastrophic financial impact on our lives, the insurer is able to use the premiums it has collected from all of its clients to pay that individual a significant sum of money, which they would not have access to otherwise.
I’m sure we’d all love to go through life without experiencing unexpected, undesirable health events, meaning we arrive at our old age having never needed to claim against our insurance policy (and complaining about what a waste of money it was), however it is good to know that if we are not so lucky, there has been science behind the premiums that we have paid in order to deliver the financial support we are now able to benefit from.
Shaun Nicol is a New Zealand Registered Financial Services Provider: FSP272065
"My mission is to make your insurance affordable, now and for your life time."
If you are not completely happy with your cover and premiums please contact me:
T: 06 870 3012
M: 0210 391 899
Shaun's advice is free and he can talk it through with you over the phone, via email, skype or meet with you in person and tailor a plan to your specific risk needs and budget.
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