Traditionally men have been charged a higher premium for life cover because of the higher risk of earlier death associated with male lives. The European Court of Justice (ECJ) has ruled that charging different insurance premiums based on gender is discrimination. As a result of this ruling unisex rates must apply with effect from the 21st December 2012.
How are premiums for life assurance calculated?
In simple terms life cover is an insurance policy that you pay monthly and in return it pays out a lump sum if you die. It’s a form of financial protection. As with any insurance the cost of cover is based on risk.
The insurance companies calculate the risk of dying using mortality tables. These are calculated by actuaries; professional mathematicians and statisticians. The three main variables in calculating mortality are age, gender, and whether you are a smoker.
Rates charged for life insurance increase with age simply because, statistically, people are more likely to die as they get older – the earlier you take out your cover the cheaper it is. Historically rates for men have been higher than those for women because women have a longer life expectancy, and therefore are a lower risk. Statistically smokers die younger and therefore pay more for cover.
These factors provide the general basis for the cost of life insurance. This is then used in conjunction with your own individual health and family history to determine your insurability and the premiums you will pay.
This is a charge added to an insurance premium because of some specific risk factor, such as a family history of a specific illness for the individual looking for a life insurance policy. It is a payment to cover the additional risk of pay out that the insurance company perceives it is taking because of the potential health issue.
As the name suggest exclusions, or restrictions, are events that are not covered by your insurance policy. Standard exclusions are contained in every policy. Specific exclusions are restrictions your insurer adds to your policy e.g. if you are suffering from a specific health issue then the policy may exclude paying out in the event of your death from that specific issue.
What impact will unisex rates have on the cost of cover?
The cost of life cover has fallen considerably in recent times due to increased competition between providers and has probably never been better value for money. The removing of the use of gender in the calculation of premiums later this year introduces uncertainty for insurance companies where it didn’t previously exist.
How will this effect price?
The life companies may reduce male rates down and bring them closer in line with female rates for a short period. However, the likelihood is that we will see the cost of premiums for women and cover generally increasing over the longer term. With the current low rates, if you have existing cover you should get it reviewed now – if you don’t yet have cover, putting it in place now could save you money.
This ruling has serious implications not just for the life assurance industry; women have historically benefitted from better rates for motor insurance because of their better claims record; men get better rates for pension annuities because of their shorter life expectancy. Whilst few would argue against the principle of equality, in this case it is removing objectivity in the calculation of risk, and the upshot is likely to be higher costs for all of us.
This article does not constitute financial advice. You should always seek independent professional advice when entering into or changing your life cover.
For more information contact us: McLaughlin McGonigle, St Helens, St Oran’s Road Buncrana, Co. Donegal. Tel +353 (0)74 9321420 / Fax +353 (0)74 9321421/or email: firstname.lastname@example.org
McLaughlin McGonigle is authorised to undertake investment business in Ireland by the Association of Chartered Certified Accountants