Banded premiums are similar to getting a group discount or a discount for buying soft drinks by the case instead of by the bottle. The amount per unit costs less the more you buy. There are very good reasons for insurance companies to offer banded premium life insurance rates. The company bases the rates on profitability of the policy. Some of the reasons have to do with their costs and others have to do with the insured's health information. It takes about five years for companies to recoup all the costs of issuing a term policy.
History
Life insurance is a unilateral agreement between the insured and the insurance company. All the insured has to do is make a premium payment to force the insurance company to keep their part of the bargain, pay off the face amount in the event of death. If the insured decides not to pay the premium, that's all right. The policy lapses and there's no more coverage. Because the insurance company can't drop you if you develop a disease, they want to take every precaution to make certain you're in good health when you apply for the policy. Securing health records costs a considerable amount of money regardless of the amount of insurance you purchase. The cost is often the same for $1,000 as it is for $25,000.
Credit History
Your credit history plays a role in the purchase of a life insurance policy. The cost to pull a credit report is the same amount no matter how much life insurance you purchase. The cost decreases per thousand the more you buy so insurance companies pass the savings on to the consumer.
Health
The larger the life insurance policy you select, the more tests the insurance company requires. This means they have a better idea of your health history and can make a more educated estimate of the number of years of your life expectancy and they don't have a surplus of unexpected claims from hidden diseases. Because of this, they keep their claims payments lower and offer lower premiums on higher amounts.
Considerations
It costs the same amount of money to pay the people that underwrite, record and do all the office details to issue a policy no matter how much insurance each purchases. As the amount of insurance increases, the insurance company pays less per thousand on these expenses and passes the savings onto the consumer.
Premiums
Servicing the policy, sending premium notices, beneficiary changes and other service work costs insurance companies money. If you compare the amount of work that it takes for a hundred $1,000 policies compared to one $100,000 policy, you understand why banding occurs. Their cost to service is simply less.
Expert Insight
When you're buying insurance, always check where the next band of premiums occur and the price for that amount. Sometimes purchasing $100,000 worth of insurance costs less than buying $75,000. Banding makes this possible. Check the banded rates with your representative before you sign on the dotted line.
