Why is employer provided life insurance so cheap?
[social_share]Many employers offer life insurance to their employees, either as part of the benefit package or at a far cheaper rate than similar policies purchased directly from a life insurance company. There are a number of reasons insurance offered by an employer is so much cheaper.
The most important of these reasons is that the employees form a group, making it relatively easy to judge their life expectancy when compared to the group’s previous behaviour. This means many life insurance companies don’t need medical examinations or other tests to correctly classify the life insurance applicants into the proper group.
Another reason why employers can offer such cheap life insurance is because of bulk buying. A sufficiently large employer can negotiate substantial discounts from life insurance companies, and these lower costs can be passed along to the employees if the insurance isn’t offered as a benefit.
However, a by-product of this bulk buying can be standardisation. The product may be cheap, but the holders of these life insurance policies may need to supplement them with additional insurance.
Life insurance is also bought by most employers on an annual basis, which can make it very much cheaper than if it were bought over the longer term. This is because a longer term policy charges the same amount at the beginning and at the end of the policy — in short, charging the same amount even when the policy holder has a lower life expectancy. If a person is insuring their life only at the age of 35, they pay a low premium because the chance of dying in the next year is low. However, if the person is purchasing a twenty-year policy, then it will also cover them at 45 and 55. While the chances of dying in those years is still low, it is not as low as at 35.
Because the employer is purchasing annual life insurance, it keeps the cost very low, although the bulk purchasing power and the ability to form a life insurance group are other contributing reasons.
