Life insurance premiums: Is this fair?

[MrSquishy]

Thanks to everyone for informative responses. I think I might take Spoons up on his advice to consult a broker. Especially since I have a few other questions I would like to ask someone who knows about insurance, but isn’t directly trying to sell it to me.

Spoons, any recommendations, since we’re in the same part of the country?

@Telemark

How do you ask about drunk driving on an application?

There was a question that asked me if I have a driver’s license, and when I said yes, if my license has ever been revoked/suspended for any reason. I didn’t try to figure out if just having a license alone affects the premiums, or if you have to have been suspended to get dinged.

One further question: does anybody have any idea why the premiums would be lower on a $200K policy vs. a $190K policy? I’m wondering if there’s something wrong with their online calculator. Premiums go up with the coverage amount from $150K -> $190K, then dip a little (like $5/month) at $200K, then increase steadily up to somewhere around $280K, where there appeared to be another slight dip. Is this common (some kind of special on certain coverage amounts?), or do you think their calculator is busted?

Another reason to talk to a human about it, I guess.

Thanks again for the help provided so far.

[Rick]

Probably a slightly different product with slightly different actuarial assumptions. It also may have to do with how much of the risk they are re-insuring.

Way back when when I was in the business there were price breaks at 10K, 50K, and 100K IIRC. Back then a 10K policy cost less than a 8K policy.

So no their online calculator probably is not broken.

[IvoryTowerDenizen]

@MrSquishy

One further question: does anybody have any idea why the premiums would be lower on a $200K policy vs. a $190K policy? I’m wondering if there’s something wrong with their online calculator. Premiums go up with the coverage amount from $150K -> $190K, then dip a little (like $5/month) at $200K, then increase steadily up to somewhere around $280K, where there appeared to be another slight dip. Is this common (some kind of special on certain coverage amounts?), or do you think their calculator is busted?

Another reason to talk to a human about it, I guess.

Thanks again for the help provided so far.

The premium dips do occur at certain points- we ended up getting a $1M policy instead of $750K on hubby becuase it was cheaper!

I don’t why it happens, but I’d be surprised if it was an error.

[UltraVires]

“If I won the lotto tomorrow, and took up SCUBA diving, auto racing, and bought an airplane, the insurance company cannot change my rate.* Hell, I could take my winnings to Vegas and use it all on cheap hookers and blow, and the company would not care. As long as the premiums are paid, the insurance stays in force. This is a fairly common misconception that the life insurance company cares about what you do. They don’t. They don’t care about any one individual; they only care about what large groups of similar people do. If you are looking at a large enough group, if one of them moves to Vegas and goes the hooker and blow route, another member is entering the monastery.” by Rick

This is exactly my point. A lot of you keep saying, well, they would have to pay out more money for smokers, and why should non-smokers have to pool themselves with smokers. Makes sense, but a similar question could be asked: Why should people who NEVER drive drunk, purchase hookers or coke, be forced to pool themselves with those who do? And don’t the insurance companies KNOW (and no, I’m not an actuary, but it’s common sense) that an insurance company will have to pay out more on the groups on people who drive drunk, use hookers and coke vs. those who enter a monastery.

Why, in this example (drunk driving, hookers, coke) does it all “balance out” so everyone should pay the same premium, yet in smoking, risk factors are weighed?

It seems like the insurance company, and some posters here, want to have it both ways:

1. Healthy/non-healthy behavior balances out
2. Non-healthy behavior does not balance out

And for the third time, I know insurance companies are only in it for the money! I think we have all admitted that. Especially with the example of the “once every six month cigar smoker”.

Who here will disagree that by charging this person a higher premium, that the insurance company is exposing themselves to absolutely no additional risk and pocketing his extra premium?

[Spoons]

@MrSquishy

Thanks to everyone for informative responses. I think I might take Spoons up on his advice to consult a broker. Especially since I have a few other questions I would like to ask someone who knows about insurance, but isn’t directly trying to sell it to me.

Spoons, any recommendations, since we’re in the same part of the country?

Well, an agent/broker will try to sell you insurance, since the agent/broker takes a commission from the insurer whose policy he or she has sold you. There are high-pressure agents/brokers and low-pressure ones too. But a good agent/broker of any type will earn their commission, through listening to what you want, answering your questions about the various insurance products available, and looking for the insurer that meets your needs. And if, in the end, you decide not to buy, then you still get some good advice and knowledge.

Anyway, check your e-mail–I sent you some info.

[Shagnasty]

@jtgain

“If I won the lotto tomorrow, and took up SCUBA diving, auto racing, and bought an airplane, the insurance company cannot change my rate.* Hell, I could take my winnings to Vegas and use it all on cheap hookers and blow, and the company would not care. As long as the premiums are paid, the insurance stays in force. This is a fairly common misconception that the life insurance company cares about what you do. They don’t. They don’t care about any one individual; they only care about what large groups of similar people do. If you are looking at a large enough group, if one of them moves to Vegas and goes the hooker and blow route, another member is entering the monastery.” by Rick

This is exactly my point. A lot of you keep saying, well, they would have to pay out more money for smokers, and why should non-smokers have to pool themselves with smokers. Makes sense, but a similar question could be asked: Why should people who NEVER drive drunk, purchase hookers or coke, be forced to pool themselves with those who do? And don’t the insurance companies KNOW (and no, I’m not an actuary, but it’s common sense) that an insurance company will have to pay out more on the groups on people who drive drunk, use hookers and coke vs. those who enter a monastery.

Why, in this example (drunk driving, hookers, coke) does it all “balance out” so everyone should pay the same premium, yet in smoking, risk factors are weighed?

It seems like the insurance company, and some posters here, want to have it both ways:

1. Healthy/non-healthy behavior balances out
2. Non-healthy behavior does not balance out

And for the third time, I know insurance companies are only in it for the money! I think we have all admitted that. Especially with the example of the “once every six month cigar smoker”.

Who here will disagree that by charging this person a higher premium, that the insurance company is exposing themselves to absolutely no additional risk and pocketing his extra premium?

Most of what you say makes sense from a pure numbers perspective but you are still missing a different aspect that is fundamental. People that buy life insurance are customers and they have many different options. There are many competing insurance companies out there and the competition can be fierce so they need to market themselves well besides playing with their statistics calculators all day long.

Smoking is a very common behavior and it is easy to divide people into smoking and non-smoking groups. The health risks are know and easilly quantifiable from an actuarial standpoint. A company could lump smokers and non-smokers together but that means the non-smokers would have to pay more and there are more non-smokers than smokers. That wouldn’t look so great on an on-line insurance comparison web site when most people see, say $500,000 in coverage as a commodity item.

Insurance companies can create additional categories if they want. Some companies won’t insure private pilots or skydivers for example but the risks for those activities are a lot harder to quantify and there are relatively few people that engage in them.

Rolling out insurance policies is like any other mass product and it costs money to get all the details and marketing right. Every new exclusion or rate increase that is implemented for certain groups costs both money and time not to mention possible hassle for existing customers. The policies tend to exist for a very long so it is in their best interest to keep them as streamlined as they can while still creating the biggest criteria that are in their best interest.

Smoking is a easy behavior for them to document. Not getting excercise at least 30 minutes 3 days a week is not nor is parting too much or being a wild and crazy guy in general.

[Rick]

@jtgain

“If I won the lotto tomorrow, and took up SCUBA diving, auto racing, and bought an airplane, the insurance company cannot change my rate.* Hell, I could take my winnings to Vegas and use it all on cheap hookers and blow, and the company would not care. As long as the premiums are paid, the insurance stays in force. This is a fairly common misconception that the life insurance company cares about what you do. They don’t. They don’t care about any one individual; they only care about what large groups of similar people do. If you are looking at a large enough group, if one of them moves to Vegas and goes the hooker and blow route, another member is entering the monastery.” by Rick

This is exactly my point. A lot of you keep saying, well, they would have to pay out more money for smokers, and why should non-smokers have to pool themselves with smokers. Makes sense, but a similar question could be asked: Why should people who NEVER drive drunk, purchase hookers or coke, be forced to pool themselves with those who do? And don’t the insurance companies KNOW (and no, I’m not an actuary, but it’s common sense) that an insurance company will have to pay out more on the groups on people who drive drunk, use hookers and coke vs. those who enter a monastery.

You are mixing apples with avocados. First off you are mixing up rating factors when the policy is purchased, I was discussing the fact that the contract cannot be modified by the insurance company once it is in force, even if the risk factors change.
Secondly, you are making an invalid assumption that life insurance companies don’t look at risk factors other than smoking. They do. Lots of other factors. Life insurance companies up rate for (charge more if you) SCUBA diving/auto racing/skydiving and other hazardous hobbies. Depending on the company and or exact circumstances they may decline to issue a policy.
[Going from memory] The question on my companies application read: Do you participate in Skydiving, SCUBA diving, auto racing or any other hazardous sport or hobby. Y/N If yes explain.
In addition, in the medical section there were questions about alcohol abuse and drug abuse.
Lastly if the policy is large enough the insurance may run what is called a mercantile report on the proposed insured. Basically they would send a guy out to interview neighbors, and run a credit check. Lifestyle choices often show up there.
At my company there were 8 different rate classes (this was before smokers were broken out in separate rates classes) In addition the underwriter could add a surcharge for any one of the rate classes. This was usually done for sports/ hobbies or job issues.
So you might see a person who auto races get a preferred rate but pay a $1/1000/year up rate for his auto racing.
I hope this clears this up for you.

[groman]

First of all, insurance companies aren’t always right, do not always correctly justify their decisions and are not making the most money they can – like any fucking business. They are grouping you together with 3-pack a day smokers not because they think they’ll make more money this way – but because they don’t have a reason to start grouping you separately. This is the status quo, and the first insurance company to try to get the “good smokers” away from other insurance companies by advertising on this point is not going to do that well. They have no cheap medical ways of telling occasional smokers apart from heavy smokers so they’d get rushed by all kinds of smokers trying to beat the system.

This is somewhat similar to the stupid 0.009 extra you get charged at the pump – the gasoline companies have no reason to change. The first gas pump to stop doing that and selling gas for 2.990 instead of 2.999 is going to lose 1 cent a gallon and look just as expensive as 2.999 across the street.