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Price vs. Cost
Is there a difference between the Price and Cost
of an insurance contract? Whether you are buying disability
income insurance, life insurance, or considering revisions
to your employee benefit package, there is a huge difference
between the Price or Cost of an insurance plan.
At The Thomas Group, Inc. we know there are very big differences,
and it is one of our missions to help our clients understand
the difference between Price and Cost in the
insurance, financial services, and employee benefit world.
Examples of Differences in Price vs. Cost
Term Life Insurance
Many people make the mistake of shopping for the lowest price
possible when purchasing term life insurance, figuring that
this is the "best deal". Often times, the real cost
associated with this mentality exceeds the perceived value
in attaining the lowest price possible. How so? Does it really
make sense to save $50 on $1,000,000 of term life insurance
by purchasing the coverage from a mediocre financial institution
when the higher price will yield the same coverage from a
highly rated, superior financial institution? Further, does
it makes sense to save a few pennies per year by buying the
lowest contract possible, only to find out that the contract
is not convertible to permanent insurance if one becomes uninsurable?
At The Thomas Group, Inc. we don't think so. There are many
factors that must be weighed when considering the real cost
of term life insurance. Life insurance is NOT some commodity
to be purchased at bulk rates from the lowest priced competitor.
Further, it has become fashionable for many insurance companies
to have as many as 12 different underwriting classes. This
means that the same companies price the same policy 12 different
ways depending on your medical history and that of your family.
Price categories such as "Preferred", "Preferred
Select", "Preferred Standard", "Preferred
Non-smoker", "Standard Non-smoker", "Standard
Smoker", "Standard Non-smoker" all mean something
entirely different. The actual price of a life policy can
differ as much as 400% after underwriting is completed, yet
when many people make their original decision to buy from
a particular carrier they are usually told nothing of these
differences. For the "lowest price" shopper it is
ESSENTIAL to understand that before going to the time, trouble,
and expense of being examined and actually applying for a
life insurance policy, that a pre-screening questionnaire
be completed. This will enable us at The Thomas Group, Inc.
to advise the "lowest price" shopper as to what
companies are best suited for him or her, and also what contractual
features are important to the client.
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Permanent Life Insurance
Perhaps no product in the insurance industry is more misrepresented
and misunderstood than permanent life insurance. What is permanent
life insurance? It is life insurance that provides life long
protection in exchange for a level premium payment. In addition
to paying proceeds upon the death of the insured, a permanent
life insurance policy accumulates cash value on a tax-deferred
basis while the insured is alive. Most of this cash value
is available to the policy owner while the policy is in force.
Buying the lowest priced permanent life insurance is usually
a very bad idea, because the ultimate cost will probably be
significant. Here's why. Permanent life insurance is exactly
what it says it is-PERMANENT insurance. Priced appropriately,
this type of life insurance policy is designed to be in-force
when you die, whether at age 45, 55, 65,75, 85, or 95. It
is very important for the purchaser to buy this type of insurance
from a company that has demonstrated a track record of financial
stability and a commitment to this type of product. There
are but a handful of companies that meet this criteria, and
we at The Thomas Group, Inc. can assist you in choosing the
right company and the right product for your permanent insurance
needs.
The price of the policy is usually irrelevant, but the returns
and the guarantees inherent in the policy are not. If Company
A charges $2,000 per year for a $200,000 permanent life policy,
but only releases $30,000 worth of dividends and cash value
after 20 years, the net out-of-pocket unadjusted cost is $10,000.
However, if Company B charges $2,200 per year for the same
$200,000 permanent life policy, but releases back into the
policy $75,000 of cash value after 20 years, the buyer of
the policy from Company B will realize a gain of $35,000.
This is quite a difference between two very similar products,
and yet this is a fine example of what happens between two
similar-looking but very different-performing policies.
The governing body of the insurance industry, The National
Association of Insurance Commissioners, has provided a standard
evaluation of all permanent life insurance policies. It is
called the Interest-Adjusted Surrender Cost Index, and it
is available from all companies who market and sell permanent
life insurance policies.
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Major Medical Insurance
Perhaps no industry in the world has undergone more radical
and profound changes in the past 15 years than the health
insurance industry. The whole ballgame has changed dramatically,
and even the playing fields that the game is played on has
changed. Traditional indemnity health insurance plans are
almost a thing of the past, and they have been replaced by
managed care in the form of Preferred Provider Organizations
(PPO's), Point-of-Service Plans, (POS), and Health Maintenance
Organizations (HMO's). Price vs. cost is an extremely important
concept when it comes to choosing the method of insuring one's
health. Obviously, the price of one's medical insurance and
what it covers will in large measure determine the cost of
one's health care. Paying $150 per month for an HMO may be
a foolhardy thing to do if the network, copays, and deductibles
and less than satisfactory. The actual cost of such a plan
could far exceed a PPO where the monthly premium is $200 but
where the network, copays, and deductibles are more "user
friendly".
At The Thomas Group, Inc. we can help you determine the real
cost of providing health care to your employees and their
families through the use of our Comparative Analysis Process.
We analyze benefits, cost, and contract available to employers
in an easy-to-read spreadsheet format that allows our clients
to make simple, easy decisions based on knowledge that is
pertinent, clear, and concise.
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