That isn't always true with life and health insurance. As we saw last time, most of the compensation is paid at the time you buy. This discourages after-sales service and encourages new sales. When your advisor phones or visits, are you more likely to get genuine service or a new sales pitch?
This time we'll look at the insurer's perspective.
How The Insurer WinsIssuing an insurance policy costs money (the insurer pays). There's underwriting whether or not you buy (checking your health and finances). There's administration (processing paperwork). There's reinsurance (the insurer buys insurance as protection against large claims). The biggest cost is the compensation paid to your advisor.
After a number of years, the insurer has covered the costs and is happy. They're happiest when you pay them money and don't pay any back to you. There's one way to guarantee they'll never pay you a claim: when you cancel your coverage.
Think of it. The insurer kept your premiums and paid you nothing. In exchange, you had peace of mind, which is very valuable. That's a fair trade and exactly what happens with insurance on your home and car. If you keep your life & health insurance, your probability of making a claim increases by the day, week and year. That isn't the situation with your home or car.
If only you would cancel, lapse or "surrender" your coverage.
Go AwayInsurers encourage you to cancel your permanent coverage by paying you money, often called a "cash surrender value" — you're the one who is surrendering. Your critical illness insurance may offer to return your premium if you cancel at age 65+.
With temporary Term 10 insurance, rates shoot upwards at each renewal. Those spikes spur lapses. (If you're in poor health, you would want to continue coverage since you're closer to a payout. The insurer would rather have the healthy lives persist. In practice, the healthy buy new coverage.)
New CoverageIf you replace your current coverage with new, you may get worse guarantees. Also, the suicide clause and contestability periods start again. If your health has deteriorated, your coverage will cost even more — if available to you.
Note: be sure that you have new protection in place before you cancel what you already have.
GuaranteesYou get more peace of mind when the insurer can't charge you more or remove protection. With home and auto insurance, the insurer can increase your premiums or reduce your benefits. Rates for Long Term Care insurance might be adjustable. Life insurance contracts generally have the most guarantees (except for whole life). .
Lapse-SupportAirlines and hotels know some customers won't show up. Why not overbook to make more money? Insurers use a similar strategy since they know some clients won't keep their protection long enough to make a claim.
In the 1980s and 1990s, some products like Term To 100, Level Cost Universal Life and Long-Term Care were lapse-supported. The more cancellations, the higher the profits. Clients were smarter than the insurers expected and didn't lapse. Fewer cancellations than means lower profits.
If you wanted to get rid of clients, what would you do? You could provide incentives to the salespeople to encourage clients to cancel coverage and buy new products instead. You could provide poor service. If premium notices aren't sent, your clients might forget to pay and lose their coverage unintentionally. Let's hope those types of actions aren't taken.
- Why after-sales service stinks for life insurance
- Three keys to getting your insurance claim paid
- Three reasons life insurance prices are shooting up
- The perils of lapse-supported products
- Lapse supported insurance (Cooper Connect)
- Lapse-supported pricing: is it worth the risks? (Glen Daily)
- Lapse-supported products: panel discussion (Canadian Institute of Actuaries) [PDF]
- Lapse-supported products: has the industry learned its lesson? (Society of Actuaries, 2008) [PDF]
- Term To 100: A Canadian-made lapse trap (Canada Life Re, Spring 2008) [PDF, see page 5]
- image courtesy of Michal Ufniak (UK)
Podcast 113 (4:52)
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PS You often win by keeping your permanent coverage since the value increases every day.