Most of us think nothing of paying our life insurance premiums monthly. However, most of us have no idea we’re spending more money on our policies just by doing that.
If you ask Ami Maishlish, President and founder of Life Guide, a producer of cutting-edge life insurance research, comparison and information software, he will tell you that you could save a whole lot of money on your policy just by paying for it annually.
“In most cases, individual life insurance premiums are paid with after-tax dollars. So, for a person in the 49.53% marginal tax bracket, one would have to earn a guaranteed pre-tax investment return of 36.842% to offset the pre-tax effective cost rate to finance life insurance premiums in monthly instalments instead of paying annually.”
This is because the factor utilized for most individual life insurance products sold currently in Canada in the finance charge is 0.09. For example, an annual premium of $1,000 financed to be paid monthly would have a monthly premium of $90. The effective financing cost calculates to 18.594% or 18.6% rounded to the first decimal place. It is a lot less when you pay an annual premium instead.
Problem is, the insurance industry is surreptitiously directing policyholders towards a monthly premium payment structure and away from an annual payment possibility. While the number of Canadians paying monthly premiums versus those paying annual premiums appears to be a closely guarded secret within the industry, Maishlish’s best educated guess — with no real statistical baring — is that 90% of Canadians pay monthly, while only 10% of them enjoy the savings that come with paying annually.
“The effective financing cost rate is often undisclosed to consumers. A good number of intermediaries are also unaware of this cost, and it’s likely easier to sell in monthly financed installment payments than the full annual premium principal,” Maishlish explains.
Just to underscore the point, the average financing load factor among Canadian insurance companies is 18.594%. However, one company carried a financing charge of 34.132% before changing it to 18.594% in keeping with the competition. On the other side of the spectrum, American company State Farm, which sells insurance in three provinces, has a financing load rate somewhere around 10%, which is arguably the lowest in the industry. However, Maishlish reveals this number is deceiving.
“That American life insurer, however, and in general, charges substantially higher premiums than its Canadian competitors. For example, a never-having-smoked male, age 39, in regular or standard health, buying $500K of Term 20 would pay $89.60 per month or $1,030 per year while only having to pay under $60.00 a month or under $600.00 a year to most Canadian life insurers,” he says. Plus, because of their higher premiums, Maishlish alleges that State Farm does not disclose their products and premium rates for direct objective comparison from advisors interested in protecting consumer interest.
So what can consumers do? Maishlish recommends trusting that old adage, “Knowledge is power.”
“If this material information was disclosed to consumers (as I believe it should be) consumers would be able to make a more informed decision. Currently, with the general lack of disclosure of this material factor, in my opinion, consumers are put at an unfair disadvantage,” he says.
Maishlish charges that both insurance carriers and advisors need to disclose the effective financing cost rate to consumers, something they can find at his LifeGuide.com site and here. As for regulators, he encourages them to enforce current regulations, while placing the consumer’s interest as their main priority.
The Financial Services Commission of Ontario recently posted a bulletin pertaining to “Borrowing to Purchase Life Insurance,” which states:
1) “Agents should also explain to clients the rationale for a particular recommendation.”
2) “The recommendations made should address the needs that have been identified and agents should explain to clients, the rationale for a particular recommendation.”
3) “It is FSCO’s expectation that agents ensure that recommendations, analyses and disclosures are documented in writing, and where appropriate, written acknowledgements are obtained. “
“The above should be equally applicable to recommendations that involve premium instalment financing, and at least, at the bare minimum, clear disclosure of the effective financing load charge rate expressed as a percentage,” says Maishlish.
Another premium saving tip if to calculate whether the client can justify saving age. Today, June 17, 2018 means anyone with a birth date before or January 17, 17 birthdate will be considered age 51 for rates purposes with most companies today. At age 50, a $500k term 20 for a male non-smoker would cost $141.44 vs. $157.50 monthly at age 51 for a difference of $16.06 monthly This would require the policy to be back dated to May 25th, 2018, so assuming it takes one month for the policy to be approved, i.e. issued July 25, 2018 and he has to pay 2 month (May & June) to save age, his breakeven to save age is 17.61 months for the two months, and a total savings over the 20 year term of $3,565.32.
I also heartily agree with the benefit of annual vs. monthly premium, and I would say approx. 20% of my clients opt for that option.
It is disappointing and rather strange that the politicians, as well as the regulators, don’t find it appropriate and reasonable to protect consumer rights to be properly informed of material facts such as this that are necessary and relevant to the decision making process. Personal debt of Canadians is excessive and among the highest. Hidden debt servicing cost rates, particularly when systematically undisclosed to consumers is a disservice to the general public. The media’s self-censorship in this regard is also unexplainable if the assumption is to be made that the media is there to inform; however, granted, the topic is neither sexy nor sensational and thus is “out of the box” of commercial media focus…not to mention that bringing up the subject may not be to the liking of for-profit bank and insurance company advertisers. In the meantime, and without reasonable doubt, millions of dollars are unnecessarily taken from consumers who are left in the dark by the non-disclosure. For readers who are paying for their term or “permanent” insurance in monthly premiums, there is a free quick and easy calculator for the financing rate at https://www.planner.ca/gen_calcs/modal_pre_cost_rate.htm Simply enter the monthly premium amount in the top field, enter the corresponding annual payment alternative in the field for “Annual Premium $” and click on “Calculate” to see the effective annualized financing rate that is being charged.
Good point Ami. Andhopefully those tax rates will start creep down a bit.
Please note that this article dates back to January of 2015. Since then, the marginal and average income tax rates have generally increased for the middle-class as well as for higher income earners. The current top marginal rate in Ontario (at time of my writing this update, June 11, 2018) is 53.53%, an increase of 4% since 2015. Thus, for a person in the 53.53% marginal tax bracket, one would have to earn a guaranteed pre-tax investment return of 40.013% to offset the pre-tax effective cost rate to finance life insurance premiums in monthly installments instead of paying annually.