Are There Really “Breakpoints” With Term Life Insurance?


Hypothesis

I’ve heard there were ‘breakpoints” with term life insurance where the insurance gets cheaper.  The classic example is that if you buy just more than $1 Million it can be dramatically cheaper than buying just less than $1 Million.  I wondered if that’s actually true, so I thought I’d check.

Methods

I used a 30 year old male non-smoker with excellent health in my state and took quotes from Term4Sale on 12/20/2012 from three companies, Banner, Pruco, and Cincinnati Life.  I obtained the annual price for each level of insurance, and then divided it to get the price per $10K of insurance and plotted it against the amount of insurance purchased, from $100K to $3M.

Results

Coverage Banner Per $10000 Pruco Per $10000 Cincinnati per $10000
50000  $               -  $               -  $        172.00  $        34.40
100000  $               -  $               -  $        146.00  $        14.60
200000  $               -  $               -  $        217.00  $        10.85
300000  $      266.00  $          8.87  $      286.00  $          9.53  $        270.00  $           9.00
400000  $      333.00  $          8.33  $      353.00  $          8.83  $        335.00  $           8.38
500000  $      400.00  $          8.00  $      420.00  $          8.40  $        410.00  $           8.20
600000  $      467.00  $          7.78  $      487.00  $          8.12  $        477.00  $           7.95
700000  $      534.00  $          7.63  $      554.00  $          7.91  $        544.00  $           7.77
800000  $      601.00  $          7.51  $      621.00  $          7.76  $        611.00  $           7.64
900000  $      668.00  $          7.42  $      688.00  $          7.64  $        678.00  $           7.53
1000000  $      715.00  $          7.15  $      745.00  $          7.45  $        735.00  $           7.35
1250000  $      877.50  $          7.02  $      910.00  $          7.28  $        900.00  $           7.20
1500000  $  1,040.00  $          6.93  $   1,075.00  $          7.17  $    1,065.00  $           7.10
1750000  $  1,202.50  $          6.87  $   1,240.00  $          7.09  $    1,230.00  $           7.03
2000000  $  1,365.00  $          6.83  $   1,405.00  $          7.03  $    1,395.00  $           6.98
2500000  $  1,690.00  $          6.76  $   1,735.00  $          6.94  $    1,725.00  $           6.90
3000000  $  2,015.00  $          6.72  $   2,065.00  $          6.88  $    2,055.00  $           6.85

I don’t see any big “breakpoints.”  It looks an awful lot like a continuum, at least once you’re buying $300K or so.  Let’s plot it out just to be sure.

I think I can hallucinate a very slight change in slope at $1 Million, particularly with Banner, but for the most part it appears to be a continuum.

Conclusion

If an insurance agent tries to get you to buy more life insurance in order to get to a “breakpoint”, I’d be awfully skeptical, at least for any amount appropriate for a typical doctor or similar professional.  There is a breakpoint at $1 Million, but it isn’t particularly significant.

However, it is clear that the more insurance you buy, the cheaper it is per unit of insurance.  That makes sense, since the administrative costs are similar whether you have a $100K policy or a $1 Million policy.  One lesson you can take away from this exercise is that you may be better off buying one big fat policy rather than 2 or 3 smaller ones.  There may still be very good reasons to have more than one policy aside from simple diversification.  You may want one policy that expires in 20 years and another that will last another 5 or 10 years beyond that.  Or you may simply buy them in step-wise fashion as your income increases.  However, you should realize that buying them that way is costing you money, and the smaller the policies, the more it is costing you per unit of insurance compared to one large policy.

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Comments

Are There Really “Breakpoints” With Term Life Insurance? — 7 Comments

  1. Nice breakdown. I have often wondered that myself. When I was getting quotes it did seem that their was a breakpoint with USAA around 400-500K but they were substantially higher than Banner so I never went back to get more quotes.

    One thing I liked about Banner was the option for flexibility. I took out 1.5mil on myself and 500k on my wife which lasts for the first 20 years of the policy and then the coverages both drop by 250K for the remaining 10 years of our 30 year policy. I was able to spread out the savings on those last 10 years over the entire 30 year policy. Gave me peace of mind but saved me a little green (9-10 dollars a month I think).

  2. In the world of investments, the term “breakpoint” is used. In the insurance world, the term “band” represents that bulk discount or lower cost per $1,000 of death benefit.

    Banner Life has three bands:

    Band 1: $100,000-249,999
    Band 2: $250,000-999,999
    Band 3: $1,000,000 & over

    Therefore, if you were to run illustrations or compare the costs just under the band to those over the band, you can easily see the difference. For example, a $200,000 20-Year Level Premium Term policy for a 30-year old in WCI’s state would be $155 while a $250,000 policy would be $155.

    All Banner policies, regardless of the death benefit amount also include a $65 policy fee

  3. Are you really saying it is cheaper to buy $250K than $200K from Banner? I noticed a similar phenomenon with Cincinnati at $50K and $100K, but that was because they apparently wouldn’t give you the healthiest classification if you were only buying $50K, so it actually was cheaper to buy twice as much.

  4. id be curious how many 200k policies they sell and if the person selling them is aware of the cost issue. at this point little would surprise me.

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