The Real Costs of Fractional (Modal) Premiums

Aug 23, 2016

  1. MichaelBurton
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    MichaelBurton Super Genius

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    Hey Folks, I just completed a little project that explores the costs our customers pay when they choose to pay fractional (modal) premiums - that is to say, monthly, quarterly, or semi-annual (anything other than annual).

    Here's the link: A Table of Fractional Premium APRs in The Life Insurance Industry.

    Some of the rates are outrageous when you see them. For example, the effective APR% of Primerica's modal charges for monthly payments is nearly 30%. I did a second survey of small policies and discovered that John Hancock's modal charges for monthly payments on small policies amounts to a 42.8% APR. Yikes.

    This is something I did not understand until far too late in my career, so I dramatically underestimated the high costs and rendered less-than-the-best advice. So, I hope you find it helpful as you counsel your clients on which payment mode will serve them the best.

    Thanks and please feel free to comment if you have any feedback, good or bad.
     
    Last edited: Aug 23, 2016
  2. AboutThatLife
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    AboutThatLife Guru

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    You must really LOVE insurance. In my experience, most clients don't care. Now if you're talking about someone who as the money to pay all at once, maybe, but most clients know monthly is the most expensive option.
     
  3. MichaelBurton
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    MichaelBurton Super Genius

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    Ha! I guess I do love insurance . . . in the same way that I love picking a good scab. It's kind of gross; but, I just can't help myself.

    Oh btw, on average, quarterly is the most expensive option, followed by semi-annual, followed by monthly.

    That's just the averages, though.
     
  4. ccbaxter
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    ccbaxter Expert

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    OK, I'm totally confused by the premise and what relevance it holds.

    When products are designed, they assume a certain expense level, interest rate, etc. with the full annual premium paid on day one.

    Paying under a different mode causes the expense to jump dramatically, not the least of which is the increased lapse rates. Postage, labor, printing, etc. have to be factored in and hence the modal factors. These are fixed costs more-or-less regardless of turning them into some type of meaningful interest rate to the insured.

    If it costs an insurance company $7.50 to mail and process a quarterly billing, they should recoup that cost from that insured, not at the expense of the other policyholders.

    To translate that into: "Ms. Insured, that 7.50 represents a 33% increase in your rate!" just makes little sense to me. Yes, pointing out the advantages of an annual payment makes sense, but it's also kind of like saying that if you drive 100K miles a year it's going to cost more than driving 50K miles a year.

    The overhead is a flat expense. In fact, one of my policies (homeowners, I think) just bills annual and adds a flat charge for each payment. And the smaller the annual premium, the higher the percentage.

    BTW, in my experience, quarterly is far and away the highest lapse rate and PITA of all billing. (Presumably monthly would be on direct bill, but I don't know of any life insurance companies that bill direct monthly anymore.)

    If the insured doesn't want the extra charge, then pay the thing annually. If you're gonna cost more, you're gonna pay more.
     
    ccbaxter, Aug 24, 2016
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  5. MichaelBurton
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    MichaelBurton Super Genius

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    I think, in general, that you figured out the relevance. See bold above.

    You are confused because you are talking from the vantage point of a salesman representing a company.

    If instead you view the options, and the desired information, from the vantage point of the buyer, then the relevance becomes crystal clear.

    The trouble is that the life insurance industry refuses to present the information in consumer friendly terms that empower the consumer to make sensible choices.

    If all of the costs were the simple pass-throughs you suggest, then why would the companies be so adamant about non-disclosure?

    I'll tell you why: because it is a well-disguised profit-center, that's why. It is not a pass through. At least not for a lot of companies.

    One distinguished professor conducted a study of Primerica's revenues about 15 years ago and estimated that its income from modal factors amounted to nearly $11M, or nearly 20% of its net operating gain.

    So, please don't kid yourself into thinking the modal factors are just expense pass-throughs.
     
  6. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    There are MANY aspects of life insurance that are not presented in consumer friendly terms. However, once it is, quality agents may lose relevance. Complexity is a competent agent's best friend.

    Bottom line: Insurance is priced annually... or you can finance it monthly, quarterly, or semi-annually. You don't finance payments for free.
     
    DHK, Aug 24, 2016
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  7. MichaelBurton
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    MichaelBurton Super Genius

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    Ahh, but in some cases, you can pay monthly for free: USAA, Pacific Life, and Zurich life charge nothing for monthly mode.

    I think this further underscores the reality that the larger modal factors represent significant profit centers. It cannot be that much more expensive to set someone up on check-o-matic . . . or the companies wouldn't be giving it away for free.

    You make some good points about being able to provide value by helping people navigate the pitfalls. And that was/is the chief reason for the post to begin with. I did not realize the value of encouraging annual premiums until I saw the modal factors expressed this way. By that time, I must have been ten years in.
     
  8. Norwayguy
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    Norwayguy I have spent way too much time here.

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    So are you suggesting we ask how they plan to pay and then run quotes and pick the lowest premium they would qualify for with underwriting? Not to radical an idea.
     
  9. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    First, what is your definition of "free"?
    Nothing is "free" in life. It is just priced differently. From one perspective you could say they offer Monthly pay for "free".... but from another perspective you could say they charge extra for Yearly Premiums....

    It is all relative to the alternatives.

    Pac Life prices their Term so that it is one of the most competitive out there from a Monthly Premiums standpoint. But they usually come in around #10-#15 when it comes to Yearly Premiums.

    BUT, the times their Monthly Premiums are the lowest, it is only by $1 or $2.... so is charging a dollar less per month than the competition "free"???
    Especially when they cost more on a yearly basis than the competition????


    A more accurate statement would be that Pac Life, unlike most carriers, does not discount Annual Premiums. Vs the competition, their annual premiums are higher than their monthly premiums are lower.



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    I think your assumption bolded above is off base. Carries make more off of monthly premiums, not yearly premiums. Not because the Premium is more, but because monthly carries a higher lapse rate vs. yearly. (limra has lots of lapse rate info)



    And it most certainly does cost the carrier more to set someone up on monthly vs. yearly. Banks often charge business accounts based on the number of transactions they make per month. The more transactions you have, the more the bank charges. It is also more time spent by employees to verify those monthly transactions.

    For every 1000 customers paying monthly vs. yearly, that means an extra 11,000 bank transactions they are charged for. That is 11,000 more transactions that the accounting dept has to keep track of and verify. So throw in the higher lapse ratio for Monthly pay, and I do not blame carriers for charging more for monthly.


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    Also, charging more for monthly is not exclusive to the insurance industry. Many things that give the option of monthly vs. annual charge more for monthly pay. Web hosting and software providers are two industries that immediately come to mind for that.


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    You also cant discount the "marketing/demographic" aspect of how premiums are priced. Pac has chosen to be really competitive in the demographic that pays monthly, but needs $500k+ in coverage. That is largely the white collar under age 50 crowd in my experience.

    LFG has priced their products (& UW) to be super competitive for the over 50, $500k+ DB demographic.

    So the target demographic plays a role too. Then there is the actual product itself. What are the conversion options? That can play a big role in pricing too. Sometimes when something is cheaper in price it is also cheaper in quality.


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    But at the end of the day "who cares"? Clients want a strong carrier, with good features, and at a good price. They dont care which company does or doesnt charge a premium for monthly. They care which company is the best VALUE for their specific situation.
     
    Last edited: Aug 25, 2016
    scagnt83, Aug 25, 2016
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  10. jboussea
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    jboussea Guru

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    i'm sure there's a cost associated with offering monthly payments for free.. .for example .. i'm sure a competitor of Zurich life has a similar product that ends up coming the customer about the same ... although zurich doesn't charge for monthly payments..
     
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