Brian Raleigh is President and Founder of TruWealth Strategies and TruWealth Capital Management.
Q. My brother-in-law says I am probably overpaying for my Life Insurance and should get an Insurance Review. Is this true?
A. You may be paying 30 percent to 70 percent too much for your life insurance and here’s why. The life insurance industry has a standardized pricing system called the Commissioners Standard Ordinary Mortality Rates(CSO). The most recent study was done in 2001 (the 2001 CSO).
Prior to 2001, the last CSO tables were only calculated in 1980 and in 1958. Why does this concern you as a policy holder? The 2001 CSO table represents a 30 percent REDUCTION in policyholder cost since the 1980 CSO. Imagine the cost difference if your policy was issued based on the 2001 table; it cost 30 percent less. You could now afford 30 percent more in death benefit coverage for your family or choose an overall 30 percent lower premium expense. Or if your goal is to build cash value growth for quicker results simply based upon the most recently dated CSO table.
Q. But I bought my Life Insurance after 1980-so, this doesn’t affect me – right?
A. I hear you and that makes perfect sense, BUT you need to understand how the insurance companies implemented the new CSO pricing model. So before you flip the page let me explain with an example.
Let’s say you bought life insurance in 1988 – obviously the 1980 CSO table applies – right? Likely…NO. In fact, its very possible that the 1958 CSO table applies to that 1988 issued policy pricing. A huge cost difference when you factor in the fact that rates from the 1980 table versus the cost tables of 1958 were 40 percent less expensive and since then the 2001 CSO tables have been published and are 30 percent cheaper than the 1980 CSO tables.
If you do the math, we are talking about a cost factor that is 70 percent higher than today’s cost for a policy issued in 1988. To put that into proper dollars and cents perspective, if a gallon of gas costs $4 today and you added a 70 percent UN-necessary mark up, that same gallon of gas would cost you $6.80 at the pump. I’m guessing you’d pull out of that station and continue down the road to the station that offered $4 gas; wouldn’t you?
In the insurance world you have to dig a little deeper to discover which pricing structure you are actually paying. I’ll explain the solution in a minute, but let’s keep going so you fully recognize the problem here.
Here’s what almost no one knows about insurance, including most financial planners, big bank trust departments, financial advisors, brokers, agents and even estate planning attorneys who deal with life insurance all the time, and it’s important: the 1980 CSO tables were not enforced until January of 1989. Think about it this way, there is this new “rule”. You know its coming yet you are not required to implement it because once you do it reduces your income by 30 percent. How quickly are you going to jump on that? Pretty slowly-right. The same was true for the insurance industry; therefore, a lot of policies issued in the 80s were priced with the 1958 CSO table and not the newer, better priced 1980 CSO table.
Respectively, the 2001 CSO rate wasn’t enforced until January of 2009. Bottom line, there are a lot of policies that are priced better in the market. A 70 percent reduction in cost can make mathematical sense in many circumstances. The best way to ensure against overpaying and/or getting less than you paid for – simply, a life insurance policy reviewed by a knowledgeable advisor.