Term A La Modal Factors
By Ami Amega, LifeTrends Product Analyst
Say you had a term insurance product with an annual premium of $120 but you instead wanted to pay it in 12 equal monthly installments. Well fortunately for you, insurers give that option using the concept of term modal factors. A modal factor is the factor that converts annual premiums to smaller, more frequent payments. In this case, dividing that $120 annual premium into 12 equal monthly payments of $10 is the same as multiplying it by 1/12, or equivalently, the modal factor of .08333. Typically, though, insurers charge a little extra for offering monthly payments traditionally to compensate for more frequent processing. That is the meat of what we are looking at: The difference between annual and monthly premiums and the amount by which monthly modal factors exceed .08333.
Most products, around 86%, use the same modal factor across the board on all age, gender, and risk class combinations. Around 7% of products showed modal factors that differed only slightly depending on the scenario. The remaining 7% had modal factors that differed significantly across all scenario combinations.
Overall, the monthly modal factors range from .0833 to .094. Zurich’s Zurich Term, and Pacific Life’s Pacific PRIME Term were the best with a monthly modal factor of .0833, meaning there is no charge for monthly payments. A whopping 74% of products had average factors between .085 and .088 and 20% of products sat at the most expensive end of the range with an average modal factor close to .09.
These similarities in the modal factors led to the conclusion that, modal factors hardly affect premium positioning. When comparing annual versus monthly premium ranks, 80% the products either didn’t change at all or only moved one or two positions. Of those that changed rank more than a couple spots, almost all of them landed in the same general quartile.
One system that has simplified monthly payments for both the insurers and insured is the Electronic Fund Transfer system or EFT for short. Though the name may vary across products, EFTs are simply an automatic payment system. They make premium scheduling much easier for both insurers and the insured by reducing the probability of missed and late payments. Though most companies offer some form of an automatic payment system, only about 35% have it as their only option for making monthly payments. An even smaller percentage offer EFT as a cheaper alternative to their traditional billing option. North American’s ADDvantage is an example of this. Their regular billed modal factor tops off our range at .094 but their EFT option has a monthly modal factor of .088. Even though their EFT factor is not spectacular, the difference illustrates how valuable the option can be.
So, insurers are charging between .2% and 1.07% for their monthly premium options, a seemingly small price, and potentially the reason why modal factors hardly affect premium positioning. Rest assured that switching from annual to monthly premium will not drastically change the competitive positioning of your product.