In my most recent post, I published a table of Fractional Premium APRs for every major company in the life insurance industry. To conduct that research, I used quotes for a $1,000,000, 20 Year Term policy issued to a 45 year old male in excellent health. In that post I indicated that I had spot-checked other policy sizes and term durations to determine if there was any variance and that I had found none.
Shortly after posting the table and its accompanying article, I was pleased to hear from Dr. Joseph M. Belth, who I referenced in my article and to whom I dedicated the original table itself. In our e-mail exchange, I commented that perhaps his influence was responsible for the fact that the highest rate I was able to find (32.5% for Fidelity Life’s quarterly mode APR) was much lower than the rates in excess of 50% he had discovered when he conducted his earlier surveys, many years ago. He modestly expressed doubt in that sentiment. He also indicated that the highest rates he found were for very small policies.
It occurred to me that I had not spot-checked any policies beneath $250K. I think that is because I rarely deal with small policies.
The exchange with Dr. Belth sparked my curiosity and prompted me to research fractional premium APRs for smaller policies. This survey focused on 20 Year Term policies with a face amount of $100,000. The survey was much more limited: I focused on large, readily-quotable, name-brand companies. And here’s what I discovered.
|New York Life||19.3%||33.1%||25.1%|
|North American (Sammons)||12.1%||25.9%||18.4%|
|Midland National (Sammons)||12.1%||25.9%||18.4%|
|Minnesota Life (Securian)||12.1%||21.5%||16.7%|
|United of Omaha||10.8%||27.0%||16.7%|
|Fidelity Life Association||9.5%||32.5%||16.7%|
|American General (AIG)||8.2%||16.1%||16.7%|
A Few General Observations
- John Hancock’s Monthly Fractional Premium APR skyrockets from an already high 18.1% to an astronomic 42.8%. Holy Rising Rates, Batman! I hope anyone who owns a small John Hancock policy is paying attention.
- New York Life’s fractional premium charges rise sharply across the board. Its monthly APR rises from 17.8% to 25.1%. Its quarterly rate rises from 18.4% to 33.1%. And its semi-annual APR rises from 13.1% to 19.3%.
- On average, all of the fractional premium charges increase for smaller policies. I think this is unfortunate because the people buying the smallest policies are the least likely to understand the real cost of paying fractional (modal) premiums. And their agents are typically the newer and more naive agents who 1) are least likely to counsel their clients to pay annually, and 2) struggling to make ends meet and perhaps more eager/inclined to quietly earn the extra commissions associated with the higher frequency payment modes.
- Despite the sharp increases of some companies, most of the APRs stay the same, or only slightly increase.
- Lincoln National’s Fractional Premium APRs actually went down for all payment modes. I think this is commendable.
A Big Picture Caveat
In closing, I will offer three explanatory comments that I believe work in John Hancock’s defense, if such a defense can be made.
First, it is important to recognize that just because a carrier maintains the same APRs for the smaller policy sizes, that carrier may still be adding cost – and in many cases, a lot of cost- to those policies. And it’s actually one of the more sneaky things in the business, if you ask me.
Many carriers increase the cost of smaller policies not through raising APRs but by restricting those policy holders from qualifying for their best risk classifications.
Many carriers increase the cost of smaller policies not through raising APRs but by restricting those policy holders from qualifying for their best risk classifications.For example, while Metlife’s modal premium factors do not change for its $100,000 policies, the best risk classification it will assign for a $100K policy is Standard Non-Smoker, its worst risk classification for non-impaired risks. This makes a huge difference. John Hancock’s annual premium is $224/year because it still allows insureds to qualify for preferred (discounted) risk classifications. Metlife’s is $328. That annualized difference in price ($104/year) is a whopping 226% more than the extra premiums (~$46) Hancock receives when one of its unsuspecting small policy holders elects to pay monthly.
Second, I note that many carriers will not sell small policies at all. For example, many carriers have minimums at $500,000 or $250,000 (e.g. Pacific Life, AXA-Equitable, and Guardian). So, while Zurich Life is to be commended for having no fractional premium charges for any of its modal premiums, its minimum term policy size in $2,000,000. That certainly is no help to consumers who can only afford small policies.
Even Primerica, which charges a dastardly 29.7% to policy owners paying monthly, refuses to sell coverage beneath $150,000. This brings me to my third, final, and somewhat reticent caveat in Hancock’s defense. It is well-known among life insurance professionals that John Hancock’s core market is affluent consumers with large insurance needs. Just a few days ago, for example, I received notice that Hancock had lowered its rates for its core market, which it describes openly as large policies. In other words, Hancock makes no pretense of trying to help small policy holders.
The Egregious Nature of Primerica’s Gigantic Monthly Premium APR
As much as it is known that Hancock doesn’t market to low net worth clients, it is even more widely known among life insurance professionals that Primerica actually targets low-income and middle class consumers for its products: people whose chief, self-identified problems are personal cash flow and, yes, high interest credit card debt. This underscores the insidious nature of Primerica’s 29.7% monthly fractional premium APR. It is nearly twice the national average APR charged by credit card lenders. And, if you can believe it, it is even 31% higher than the national average credit card APR for people with bad credit!
It would thus not surprise me at all if Primerica’s decision to set its minimum policy size at $150,000 has more to do with minimizing the risks of further class action litigation than sparing low-income consumers from its own exploitation.
An important author’s note: the presence of a high modal factor (and APR) on your specific life insurance policy may be unsettling; however, it 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 (mode), to avoid unnecessary costs. 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. Never make the assumption you can get a “better deal” just by fielding some up quotes from an agent or a website.
© Michael C. Burton, 2016 and all years.