Term insurance is simple, right? Not so fast. There’s more to it than you may think. Many people assume that association term programs and group term insurance are good products and competitive. Usually, this is far from the case.
We’re not trying to slam association and group term products but they aren’t always what people understand them to be. They are prevalent because they are easy to sign on to, but how many things in life that are particularly easy are the best? Let’s be honest. There is a reason uncompetitive and inferior products include processes that make it easy to get people on board. If they didn’t, no-one would ever buy them.
Young professionals and new employees are often presented with a package and it’s easy to sign up for term insurance. Often times it's with a recognizable and respected insurance company and it seems inexpensive, especially for young people. To be clear, there are individuals who can benefit greatly from these offerings and should take advantage of them. This largely includes people who are uninsurable or are young and want insurance only for a very short time. However, most people should not be in an association or group plan.
These products are expensive. Why? Basically, because they are socialized insurance. What does that mean? They charge more in a cost sharing scheme so everyone can have it. If an individual could qualify individually for insurance coverage, even at an average rate, their cost would be meaningfully, and sometime dramatically, lower than the program costs. The reason the program costs are so high is so that people who could otherwise not get individual policies on a favorable basis can get subsidized coverage. Most of these programs do not require medical underwriting and it’s obvious where pricing has to be if the participants aren’t underwritten.
Have you ever voluntarily paid more for car insurance so someone else who has had accidents can pay less? Would you consciously enter into a socialized service program if a competitive, market based option with better benefits and more control was freely available to you?
Then why would you ever knowingly and substantively overpay for a demonstrably inferior insurance product with limitations and lack of control? Probably because you don’t know it is a demonstrably inferior and expensive product with limitations. The products offered through the programs are not the same products offered to the market at large. They are objectively more expensive and inferior products. Even though the insurance company behind your program may be a big name carrier, the product offered to you through the program is a “special” product that is worse than if you replied to a spam email offering term insurance.
Sometimes there is a psychological aspect to the marketing where members feel their professional association is comprised of individuals healthier than the market in general so they are obtaining better rates. This is absolutely false and you are likely wasting money if you are participating. Your overpayment is subsidizing others who can’t obtain the better rates you can for the protection of your family. There may also be a profit sharing aspect for the association. It simply doesn’t make any sense.
This is your money and your family. If you’ve worked hard and made a habit of good financial decision making through life, why not continue your track record regarding one of the most important financial and protection decisions of your life?