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Premium loading is where
the insurance company takes the basic
premium that they wish to charge for a
certain level of cover, and adds an amount.
The amount that is added to the premium
is aimed at covering the expenses that
the company incurs selling the policy,
the profit that the company wish to make
on selling the policy, and a margin created
for contingencies.
The basic premium is worked out by taking
the information that the customers give
the insurance company and calculating
the possibility that the company will
have to pay out the benefit. This is combined
with the other policies which the company
has, and the basic premiums will normally
be worked out so that the premiums paid
will match exactly the benefits paid out.
Now, the benefits paid are not the only
costs to the insurance company, and when
put together with the fact that the company
is a business aimed at making profits,
you can see why loading is necessary.
As far as expenses are concerned, when
an insurance company sells a policy, they
have administration fees, including paperwork
and the time that their staff take to
do the work. They also have to pay for
sales and marketing, in terms of advertising
their products and paying commissions
to financial advisers who put business
their way. In addition to this are the
running costs of an insurance company.
The salaries of the staff, the cost of
the facilities in which the company works
such as phone bills and rent etc all have
to be covered by the premiums, which is
the source of income to cover all of this.
To make a profit, the company needs to
take account of the basic premium, add
on the expenses and then add a further
amount on to ensure the company makes
a profit. Should they only break even,
the company misses out on the chance to
grow, to innovate with new products, and
to reward staff and shareholders. |
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The other problem with
only breaking even is that if something
should happen causing the insurance company
to be saddled with an unexpectedly large
liability they could develop some problems.
Perhaps the most famous example of a "contingency"
would be the World Trade Centre attacks,
where 3000 people died, many of whom had
life assurance. A life insurance company
is required by the law to have sufficient
capital to cover any eventuality. Premium
loading helps them to build up a reserve
to cover this.
"Low load" life insurance policies are
available with fewer expenses built into
them. These can be purchased through "fee
only" financial advisors. Commission goes
straight to you to help you build up a
fund. Or through an insurance company
directly, who don't have to pay an IFA.
Seek out no-commission
policies.
"No-load" or, more appropriately, "low-load"
life insurance policies have fewer expenses
built into them, such as agent commissions
and fees for marketing, than more traditional
life insurance policies. This can translate
into lower premiums or, for variable life
insurance, these lower expenses mean that
a higher percentage of your premium goes
to work for you right away - so that you
can build your cash value faster.
No-load policies can be purchased through
"fee only" financial advisors - who don't
receive product-based commissions for
selling you financial products but rather
charge you a flat fee - or directly from
several companies.
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