Introduction to the Table of Fractional Premium APRs
All life insurance companies allow their policy holders to choose the frequency of their premium payments. The most common payment modes include annual, monthly, quarterly, and semi-annual. When a policy holder elects to pay a fractional premium (anything other than the full annual premium for the coming year of protection), almost all life insurance companies add to the costs of the policy.
In some cases, as you will quickly gather from the table below, the charges are extremely high. Even so, upon visual inspection of just the premium payment options (which is all that most life insurance companies provide), the additional costs rarely look as onerous as they in fact are. In this manner, through the willful omission of information they could easily provide, most life insurance companies effectively deceive their customers into paying for their protection in such a way that provides a well-disguised “lending” profit for the companies. In at least one case (Primerica), the “lending” profit center was estimated by a noteworthy Professor of Insurance at a major university to be as much as 20% of its net operating profit.
The table below lists the fractional premium APRs of every major multi-state life insurance company in the United States. This makes the work of choosing the client’s best source of funds to pay his/her life insurance premium quite simple: if the client has a source of capital with a lower APR than what you observe in the table below, then it will be to the client’s financial advantage to use that alternative source of funds to pay the full annual premium.
A Six Figure Demonstration of the Significance of The Problem
Let’s say a client has a savings account that pays a paltry (but, sadly, average) .08% on his/her account balance . . . while Primerica also charges a 29.7% APR for the “privilege” of letting the client pay premiums through an automatic monthly bank draft. In our analysis of a new 20 Year Term issued to a 45 year old male in good health, paying the annual premium from the low-yield savings account (and replenishing the savings over the coming year) would save the client about $193/year. Now, that figure may or may not seem like much. If it doesn’t, here’s another way to look at it: the net present value of that cash flow savings over the lifespan of the policy amounts to nearly $3,800!
Still don’t think it matters? We’ll wager the client’s heirs might disagree. Vehemently. Consider that using that annual savings (~$193/year) to simply buy more insurance at Primerica’s (least expensive) annual rates would result in approximately $140,000 of extra death benefit for his/her heirs . . . for the same out-of-pocket costs!
So, that is at least one reason why understanding Fractional Premium APRs is so important. If you are going to buy life insurance, you might as well buy it efficiently.
So, with that introduction, here’s the Table of Fractional Premium APRs for your consideration. Even if the client is committed for whatever reason to paying fractional premiums, this chart will hopefully assist him/her in choosing the mode with the least costs.
Fractional Premium APRs by Company
|Company Name (Holding Company)||Monthly APR||Quarterly APR||Semi-Annual APR|
|New York Life||13.1%||18.4%||17.8%|
|Minnesota Life (Securian)||12.1%||21.5%||16.7%|
|North American (Sammons)||12.1%||25.9%||18.4%|
|Midland National (Sammons)||12.1%||25.9%||18.4%|
|Life Insurance Company of Southwest||12.1%||10.7%||8.2%|
|Lincoln Life of NY||10.8%||12.9%||12.4%|
|United of Omaha||10.8%||27.0%||16.7%|
|Savings Bank Life||9.5%||10.7%||8.2%|
|Fidelity Life Association||9.5%||32.5%||16.7%|
|American General (AIG)||8.2%||16.1%||16.7%|
|Farmers New World||1.0%||1.6%||1.2%|
|USAA Life Insurance Company||0.0%||16.1%||16.7%|
A Brief History of Fractional Premium APR Disclosures . . . and a Tribute to a Bold Professor
Dr. Joseph M. Belth, Professor Emeritus of Insurance at Indiana University’s Kelley School of Business, first began championing the cause of fractional premium APR disclosure over four decades ago, in 1973. Writing in his self-published and increasingly influential trade journal, The Insurance Forum, Dr. Belth began to call serious attention to the issue.
Over time, some opportunistic litigation attorneys began to take notice, filing class action lawsuits against a host of life insurance companies in several states across the country. Against Dr. Belth’s better judgment, these lawyers eventually prevailed upon him to testify as an expert witness in a handful of their cases. Dr. Belth’s concern was for consumers to know the truth about their costs and opportunities; not to help attorneys score a huge payday, or to earn large expert witness fees for himself. He voiced his concern that consumer protection would be forsaken when push came to shove. The attorneys assured him that no settlement would be accepted that did not require full APR disclosures from the defendant insurance companies to their consumers.
In the end, unfortunately, Dr. Belth’s misgivings proved to be prescient. Virtually all of the cases settled out of court under terms that resulted in massive windfalls for the attorneys but very little in the way of meaningful, ongoing consumer protection. To date, the chief fruit of most of the litigation includes a handful of obscurely placed Fractional Premium APR calculators posted on some of the defendant’s websites. The terms of the settlements ultimately compelled only one company, Mass Mutual, to fully disclose its fractional premium APRs within all of its policies.
Many years ago and long before I knew of Dr. Belth or any of this back story, when I first observed Mass Mutual’s APR disclosures in a (rare) Mass Mutual policy I had sold, the printed disclosure startled me. Even with many years in the industry, like most consumers I had greatly under-estimated the actual APR through the same type of erroneous math that Dr. Belth describes in his August 2006 Insurance Forum article, “Why Annual Percentage Rates Associated With Fractional Premiums Should Be Discloseed And Some Easy Ways To Perform The Calculations.” I distinctly recall remarking to my assistant how admirable it was that Mass Mutual had taken the initiative to help their customers (and their agents) clearly see the true costs of paying non-annual premiums. Even after nearly a decade in the business, I was still quite naive about what it takes to get life insurance companies to shoot straight with their customers . . . especially when a huge, well-disguised profit center is at stake.
With that in mind, I would like to dedicate this Table of Fractional Premium APRs to Dr. Joseph M. Belth for his noble efforts on behalf of life insurance consumers in this important area.
(Author’s Note: If you are at all interested in the life insurance industry or journalism, I highly encourage you to purchase and read Dr. Belth’s memoir. While reading about the life insurance industry is frequently boring and tedious, Dr. Belth’s memoir defies expectations. It is a delightful, dense, provocative, page-turner. And without question, it should be on the shelf of any serious life insurance professional. You can purchase his memoir directly from The Insurance Forum through its website: http://www.theinsuranceforum.com/pages/memoir.html. $50 is not cheap, I realize. If your budget it tight, I’m sure you can pick up a used copy on Amazon. Whatever you spend, you won’t regret it.)
A Few Important Caveats and Explanations
The rates in this table were derived by obtaining and analyzing each company’s premiums for a 45 year old male buying a new 20 Year Term life insurance policy in August 2016. We also spot-checked other policy durations (e.g. 10 Year Term, 20 Year Term) and insured ages (e.g. 35 year old female) to ascertain if any companies changed their fractional premium APRs based on the term duration of a policy, or the age/gender of the insured. While we were unable to find any variance based on these factors, our spot-checking was by no means an exhaustive search. It is thus possible that some of these companies might use different fractional premium APRs for different policy durations, types, or even insured ages. It is also possible that the fractional premium
APRs used for current policies have changed since the time an older policy was purchased.
(Author’s Note: I subsequently made a deeper inquiry into fractional premium APRs for small policies which revealed that fractional (modal) premium expenses do in fact tend to increase for small policies. And in some cases, most notably with John Hancock and New York Life, the rates increase precipitously.)
To confirm specific fractional premium APRs for any specific policy in question, we highly recommend that you use Dr. Belth’s free APR Calculator which you may find at http://theinsuranceforum.com/pages/aprcalc.html. All you’ll need to ascertain the specific APRs is the various premiums associated with each of the policy’s modal payment options. A schedule of each policy’s modal payment options can typically be found in the first few pages of the life insurance policy. In some cases, where the policy does not even provide the alternative modal payment options, it may be necessary to reach out directly to the insurance company or the sales agent to obtain that information.
We relied heavily on information from multiple third parties including quotes directly harvested from insurance company websites or by phone from the companies themselves. In a few cases (represented by the “-” symbol in table) insurance companies either did not have quarterly or semi-annual premium options (or they would not make that information readily available).
While we have made every effort to obtain and present accurate information, this table is subject to unintentional errors and/or omissions for which we will not be held liable.
A Final and Important Warning To Policy Owners
The presence of a high modal factor (and APR) on your specific life insurance policy may be unsettling. You may feel tricked and angry. However, a high APR does not form the basis, in and of itself, for changing policies or switching carriers. It could be a reason to explore your options with other carriers: I believe it does provide a window into the character of an organization. And it is most certainly a good reason to consider changing your payment frequency to avoid unnecessary costs (if you can do so).
But only after a comprehensive comparison of your policy to any replacement alternative should a switch of policies be undertaken. And even then, you would want to have a fully underwritten, firm offer of coverage in hand before you took the risk of letting your existing policy lapse.
Finally, never make the assumption you can get a “better deal” just by grabbing some quotes from an agent or a website. Even our own web quoting engine, termlifecomparison.com, only provides preliminary pricing – not fully underwritten offers of coverage.
It is fine and appropriate to be frustrated if you discover you have been paying high costs that you could have minimized if you’d known better. But don’t go make a rash decision to switch policies without conducting a full analysis and having a firm offer on the table.
© Michael C. Burton, 2016 and all years.