In most of our commercial endeavors, we would ideally like to obtain the most value for our expenditure. The most value doesn’t mean the item is the best, but is also doesn’t mean it’s the cheapest. For example, a $500 suit could be a better value than both a $1,000 suit and a $250 dollar suit. It isn’t necessarily a better value; indeed, either of the other suits could represent the best value. The point is that there isn’t always a direct correlation between value and price.
Of course the same holds true for life insurance, yet I am frequently confronted with the situation where an individual only considers price (premium) while totally ignoring value. This is dangerous because there is never a true “apples to apples” comparison regarding life insurance. There are always differences, even with term insurance. Some of those differences are subtle and nuanced, but some are significant.
One significant difference exists between group insurance and individual insurance. Sometimes insurance in a large group plan can have a much lower premium than an individual policy. That, in and of itself, doesn’t make the group plan a better option, but many people think it does.
The fact that an individual policy will usually cost more than a group policy does not make it better, just as the lower premium does not necessarily make the group plan better. To be better, it must provide more value, and to provide value, the item must perform as expected. If it can’t do that, then the price doesn’t matter.
For example, if you determine that you need the coverage for a certain number of years, the group plan might not be appropriate, for a couple of reasons. First, the group plan can be cancelled by the carrier or employer at any time. Second, if you leave the company, you cannot remain a member of the group.
In the life insurance arena, this is why understanding if the policy will meet your goals is so important. Only when you determine that it will do that can you figure out its value.
The relationship between price and value is neither linear nor proportional. Sometimes, items that cost less provide more value, while other times the more expensive item provides more value. Because of the high price, many question the value of designer merchandise. However, despite its price, few would question the value that a Rolls Royce provides (unless having your car last 78 years isn’t important to you).
So don’t fall victim to the lower price/premium ruse. There is, in all likelihood, a very logical reason as to why one premium is lower than the other. Sometimes, it’s as simple as the lower premium provides less utility. And less utility often means less value.