This example is an analysis of a direct mail that I received from the CAA recently.
It offers CAA members the 'exclusive opportunity' to apply for an 'economical', 'valuable Group Term Life Plan', 'designed exclusively for our members'. Recipients were given even a deadline by which the application forms should be returned, lest this very special opportunity should disappear.
.... Enough of citations and irony, let's see why so many people fall to such kind of offers from not not just the CAA but also from various credit card companies or directly from some insurance companies, and then let's examine
the real value of such opportunities.

Many people might think that this way of distributing must be less expensive as through an agency system, ... but it is not so. For an explanation, my first guess would be it might be because of larger bureaucracies of those companies using this method. Instead of going into much arguments and speculations about this issue, it's better to check out the facts with an appropriate comparison software tool.

People might prefer the non-intrusive nature of such offers, and there might be some validity in such an attitude. For some situations, and some people, it may really seem that there is no need for professional assistance. Sometimes the issues can be simplified, and many people do not realize that they can easily lose because of that simplification. They can escape a few questions or suggestions by a professional at their own peril; on the other hand, there is no promise or guarantee in these offers that they will not be asked about their health during the unerwriting process, of course. The 'privilege' offered by the direct mail refers to submitting an application, not to the blind approval of it.

This particular offer I received, and probably all the others of this kind, abounds in catchy terms and expressions. A few quite common conditions (e.g., 10 day free inspection, non-cancelability because of deterioration in health, no premium increase on an individual basis, simplicity of medical screening) are presented so that the reader might get the impression of how exceptional they are. The premiums look not bad, and even the return envelope is postage-paid :-). However, even before making some calculations, the following reservations can be made regarding the quality of the offered group insurance policy, as opposed to what someone can get by buying an individually owned term insurance policy:

  • This renewable group policy is available until age 70; a lot of term policies are out there that can be renewed until age 80 or even 85.
  • There is no guaranteed convertibility option with this group policy, something that is available with many of the available individual policies. Even if you don't want or cannot afford some permanent insurance protection today, you may want it later because of change in your personal or financial situation, or just because you realize how advantageous it can be to combine insurance with retirement savings. It's good to have at least the opportunity to switch to such policies, regardless of how your health changes.
  • Even more important than the above points is the lack of real guarantees for keeping the policy in force. Since it is a group policy, it can actually be canceled by the company any time, while there is no such an option with most individually owned policies. All that the group insurance guarantees is that you will not be singled out for cancellation, ... I see little comfort in the possibility that I can lose my protection not alone but together with many others if I buy this policy.
  • The treatment of premium guarantee is the same; there is NO guarantee of any kind that the premium will not be raised, ... not for you individually, but for the whole pool of policy-holders.
  • There are no riders (waiver of premium, living benefit, child protection, etc.) available with this group policy, some of which you might find valuable if you buy an individually owned policy.

As for the costs, ...
yes, they seem quite reasonable ... for the short term at least, .... and as long as they are not raised. I checked out the case of a 30 year old nonsmoker healthy male who wants to buy a $150,000 policy. He should pay $14,25 a month in the first five years (do not forget for a moment: unless the premium is raised for the whole group in the meantime), and the absolute minimum available on the market of individually owned policies is currently $13,77 per month. There is only one more policy with starting premium lower than what this group policy offers. However, saving a few cents or bucks a month today may cost a lot later.

Our 30 year client will probably need the protection for a long period. He might become uninsurable, or his health might deteriorate that would induce extra-premium if he wants to buy a new policy later. Because of this, it seems to be a good idea to make a long term comparison and to 'lock in' with a policy that is not significantly more expensive now than the cheapest available, but which has very good renewal rates.

I made some number-crunching with a 5 year renewable individual policy that seems to be one of the best available currently. If our client is very healthy, he can start with a monthly premium of $14,44. If his health is about average, his premium would be $15,12. A small difference of this magnitude remains for the advantage of the group plan (again: unless its premium is increased in the meantime, ... something that cannot happen with the individual policy) for 20 years. However, when he reaches age 50, the difference will be larger (not $1-2 anymore, but $12-14), but to the advantage of the individual policy this time. Finally, there is no protection with the group plan after age 70, while this is available with the individual policy for 15 more years.

Even if there will be no premium increase with the group policy, our client could pay $24 from age 40, and $34.50 from age 45. If, however, he buys a 20 year term policy, his monthly premium is guaranteed to remain $17,82 or $19,98 in the whole period of 20 years. In the final year when comparison can be made at all, at age 69, the promised premium for the group policy would be $202,50, while for the individual policy he it is contractually guaranteed that he will pay $73,58 (if very healthy today) or $76,95 (if his health is average today).
All in all, even if this group offer is really much cheaper than many of the available individually owned policies, it can hardly be recommended if you compare it to one of the best of those individually owned policies. With this latter one, one pays considerably less (22-23 thousands, as opposed to minimum 30-34 thousands, until age 70) for the 20 year policy than for either the group or the individual 5 year policy. Still, the main problem is not the price, but the lack of quality features, eminently that of guarantees one can easily get with an affordable individual term policy.

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