The first element in the equation is mortality rates. Put simply, the amount of individuals in a given demographic that can be expected to die in a given period. Mortality tables are pretty standard with life assurance companies, tending to use similar basic numbers. As an extreme example, 100 % of people aged between twenty to 40 in the UK can be expected to die within another 150 years. But have you thought about the next 10 years? There are numerous variables that will influence this, including latest health, family health history, occupation, lifestyle, gender etc. If we look at a group of hundred males aged 39 who’re overweight, smoke and in a stressful occupation, it would be reasonable to imagine that much more of this group will die in the following ten years than a group of twenty five year old female aerobics instructors. Historic analyses of these demographics lead to the life insurance company’s mortality tables that are used to evaluate the risk. The application forms for life assurance ask lots of questions which are designed to determine which category you fit into instead of assess your individual mortality rate.
The insurance company is going to publish a standard premium for all males aged, say, thirty years old but will apply a’ rating’ in case the occupation of theirs or medical history, for example, puts them into a higher risk category. This rating only becomes known to you after your application has been assessed by the life insurance company underwriting department. Although underwriting should be rather regular, in practice some life assurance companies can be tighter than others when assessing certain risks. Independent Financial Advisers will have experience of the underwriting criteria for different businesses and need to be placed to recommend appropriate products if the personal circumstances of yours are not’ standard’. Occupational ratings in particular can vary considerably between life insurance companies,
The expenses of the life assurance company are a crucial component. One of those expenses is the cost of marketing their products and will include advertising and running a sales force for instance. These expenses can be substantial and are built into the premiums of the life assurance products. Companies who distribute their products via Independent Financial Advisers will have a tendency to have lower direct marketing costs than those companies who deal direct with the public. They tend to fight on a cost basis leading to lower premiums. The capacity of the company to have effective administration and also the optimum number of staff dealing with the applications and claims will be reflected in the premiums charged. Commission paid to advisers who recommend the products, varies between companies and this is a further cost to be built into the final premium.
To sum things up, the price is comprised of the principle cost due to mortality rates plus the operating costs of the provider, plus the expenses of any advice. So in case we take advice out of the equation, will you save money? Possibly, but those companies marketing their products with no advice will have higher marketing costs which will offset the removal of the cost of advice. Without advice you will be able to realize that the product isn’t the best to your personal circumstance. In the following article, I am going to explore the question of advice and whether it can add value.