Loading Life Insurance - UK Life Insurance Advice

What does it mean when they say they are "loading" a life assurance policy?

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.

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.

What does it mean when they say they are "loading" a life assurance policy?

© AskFinancially.com 2008

Life Insurance

Insurance & Loans

Copyright

What does it mean when they say they are "loading" a life assurance policy?

© AskFinancially.com 2008

Life Insurance

Insurance & Loans

Copyright