(This piece is a mash up of two of my articles published on wealthmanagement.com July 26, 2017 and Feb 19, 2019)
Look closer and you’re likely to be surprised.
If you’re a professional, chances are you’ve looked at group term rates through a professional association. For example, many CPAs have their term insurance through the American Institute of CPAs (AICPA), which has served many people well over the years. But, is it really what you want?
I’ve spent a lot of time reviewing fellow professionals’ various association term (ATerm) programs and company group insurance and I’ve come to some clear conclusions. While it may make sense for some people to get insurance through a group, if you’re a reasonably healthy individual, you’re much better served going to the market, being underwritten and owning your own contract.
The Appeal of Groups
I’ll focus on the AICPA program, as it’s what I run across most frequently though doctors, attorneys and others have similar programs. Some of the appeal of ATerm policies is the lack of a medical exam. Some people are needle-phobic or some don’t want to hassle with it. It’s also convenient that an envelope shows up in your mailbox, and you don’t have to deal with a salesperson or even leave your house to complete the process. You may go for it because you know or believe you can’t qualify for individually underwritten coverage. There are health questions, but they’re much more liberal than an exam. Depending on age, there may be multiple classes. The CPA program has two different levels of non-med contracts, and a more competitive level if you’re amenable to an exam and qualify.
Group term is generally not underwritten at all and is conveniently payroll deducted so it is relatively painless because it’s only a tiny amount per paycheck and you don’t see it. Of course, this is part of the problem.
What do we know about “group”? Generally, it’s about making it easy to participate and spreading the risk. Group coverage is simply not competitive across the board because the healthy individuals are subsidizing the less healthy individuals. If you’re a die hard socialist and don’t mind paying more for the coverage of an unhealthy person you don’t know, there’s nothing preventing you from doing so. I’m sure you are also making the car payments for a Cadillac while you drive a Chevy. I find that people often think that the group they belong to is inherently healthier than other groups, so the rates must be very competitive. Well, they’re wrong. My dad was a member of an association of physicists and thought the same thing. I’m not discounting the value of this. In fact, if it’s what got him coverage to protect his family, it was a great service and value.
Back to socialism. If the healthy have to support the unhealthy, then the healthy have to pay more than they otherwise would have. It’s the way it works. If you can carve yourself out of the herd and qualify for better, then that’s your right, and you’ll be rewarded for doing so. This is no different from buying merchandise on sale, using coupons for groceries or comparing contractors when you need a new roof.
Comparing the Numbers
Let’s talk about the numbers. Group coverage is a good deal if:
- you’re unhealthy and all you can get is the association or group coverage
- you’re young and want coverage for a short period.
There, we covered it.
Outside of that, you’re flushing money down the crapper. Many association programs charge you a higher rate and then offer a refund at the end of the year based on experience so checks are passing in the mail. For CPAs and their spouses, depending on age, the refunds ranged from 36 percent to 55 percent in 2016. For the life of me, I haven’t been able to figure out why they need to charge twice as much only to send back half of it. Is there any likely scenario in which so many CPAs would die in a given year to drive claims up that much? I’m not sure if the national CPA convention is a terrorist target but that might be a contingency. Maybe they’re counting on making money on the float.
While other term plans are available, a vast majority of plans I see are for the program with 5-year premium steps. This means every five years, your premium increases and at many ages the premium doubles or worse. I tend to get calls from people whose current age ends in a four or a nine when they see the pending increase.
For purposes of comparing numbers, I’m going to only quote net numbers, after refund (actual 2016 refunds) for ATerm coverage. I’m also assuming preferred non-smoker for individually underwritten policies. This is the second best level of underwriting and obtainable by many people. Also, all numbers are for $1 million of coverage. Finally, I’m just quoting male rates for now. Female rates follow the same trend.
If an individual couldn’t qualify for preferred individually underwritten Term (ITerm) then he probably couldn’t qualify for the better of the non-med ATerm anyway, and we would compare apples to apples at standard rates for both ITerm and ATerm. If someone was healthy enough to qualify medically for the best underwritten ATerm, then I‘m going to assume he could qualify for the best rates of ITerm.
In the table below, you can see that pricing for a 30 or 40-year-old individual isn’t bad for the short term although it gets less attractive the longer insurance is in force. Interestingly, with ATerm, there’s no preferred or underwritten option while there is with ITerm. ITerm is available at better rates than reflected in the table. They are reasonable attainable for many people and, if procured, would lower the ITerm cost so meaningfully that almost no-one would benefit from the association program on cost alone.
Looking at a 40 year old, you can really start seeing the divergence for 20-year term, and with a 30-year term, the difference is off the charts.
For a 50 year old, ATerm isn’t even an attractive option if there’s a 10-year need, and it gets worse for a longer term.
For a 60 year old, the numbers fall apart laughably.
Heaven help you if you’re a 70 year old and still need insurance. One million dollars of coverage will run about $15,000 for five years (ATerm coverage cut in half at age 70 and terminates at age 75). ITerm is about half that for a full 10-year term.
Now you see why 44, 49, 54, 59, 64 and 69 year olds start calling to look at options. It’s difficult to accept the “social good” of socialized life insurance when the premiums start unnecessarily emptying your pockets. A significantly better strategy, if your client’s intent is to keep the coverage for 10 years or more, would be to lock in the premium for a 10-, 15-, 20- or even 30-year period, which would result in a significantly less expensive cumulative premium and maybe even less right out of the gate. Not only would the cost be less but the product would be better, you wouldn’t have to write a large check and wait to get a third or half of it back next year, you would have more control, you wouldn’t need to maintain an association membership, the death benefit wouldn’t be cut in half at age 70 and it wouldn’t go away at age 75.
- There are coverage limitations on ATerm relative to age and amount.
- Refunds can vary meaningfully year to year.
- ATerm coverage is portable only if you maintain your membership.
- Conversion options are shockingly subpar.
Conversions due to Poor Health
The AICPA plan doesn’t even allow you to convert without terminating membership in the AICPA (per conversations with AICPA representatives). If it came to that, and you needed to convert, the only option is conversion to some archaic policy kept on the shelves for the only purpose of hosing people who are backed into a corner and have no other option. (In the insurance company’s defense, this is the necessary result to cover people long term who didn’t have to get out of bed to qualify for their coverage.) No one in their right mind would ever go to the market and choose the policy the insurance carrier offers for conversion. By the way, the carrier offering the AICPA coverage also has an entire portfolio of competitive, modern products available, but you’re excluded through the association program.
Let’s say a 60 year old comes to the conclusion he needs to convert his $1 million of term to a permanent product. An individually underwritten lifetime guaranteed premium and death benefit policy may be available for as low as $15,000/year while the association conversion would be about $40,000/year. For a 40 year old, the numbers might be $5,000 vs. $15,000. Why put yourself in that position?
Group Term Insurance
Group term insurance is usually the same story. A recently evaluated situation showed a husband and wife’s group coverage was so outrageously expensive that they could cut their costs by more than half out of the gate. Furthermore, in five years, their cost for individual coverage would be 25 percent of what they were paying for group coverage, and in the last five years of a 20-year term policy, the monthly premium for their group coverage would be equal to the premium for an entire year of an underwritten market alternative.
A university professor friend just asked me to compare the school’s plan to the market and the market numbers are half. My experience with group rates is that they are even more expensive than association term rates.
Association term is a competitive, if not quality, option if you are under age 40 and looking for short term coverage. Layer in the aforementioned contractual features, and it could be argued the association and group term is never a good idea if you’re otherwise insurable at decent rates. For some, it will be an attractive temptation to purchase the low cost ATerm when the rates are beneficial and then go to the market for competitive ITerm when they become the more attractive option. However, a certain percentage of participants won’t be able to do so at that point and will be locked into quickly and dramatically escalating rates. This is another reason the young and short-term rates can be competitive. The actuaries know that a given group of participants will be forced to pay above market rates when their insurability changes, which is why the plan locks them in. It’s a bit diabolical.
Keep in mind that although association and group plans make it easy by not requiring a medical exam and maybe providing convenient, automatic payroll deduction, it’s simply not worth the additional for most people. If you’re relatively healthy and choose an association or group term product, you’re unintentionally subsidizing those who have health issues and are unable to qualify for a standard or preferred rating on their own. And if you’re worried about those individuals, the uncompetitive plan will always be available to them.
Looking at what it costs for ATerm on the youngest professionals, when ATerm has only one class into which every participant is placed, relative to individually underwritten term even at the very best class, not only are the healthy subsidizing the less healthy, but also, the older are subsidizing the younger. My guess is that the very low non-medical rates offered through the association on the younger professionals are artificially low to lure in participants who will then pay obscene rates later like the proverbial frog slowly boiling.
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.oc-lic.com, www.BillBoersmaOnLifeInsurance.info and www.XpertLifeInsAdvice.com or email at email@example.com.