The Quickest Way to Save Thousands on Your Life Insurance Premium
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.