Rebroker health insurance benefits for a keener price

Executive Summary

• Life assurance is price driven, so to reduce the premium look for a more competitive deal every couple of years.

• Private medical insurance premiums can be reduced by removing psychiatric cover, alternative therapies, maternity cover, exclusive hospitals and by adding an excess. Switching providers can also produce big savings.

• Group income protection costs can be reduced by moving to a contract with a limited term (instead of paying out until retirement) and/or reducing the benefit level.

• Whether employers pay a commission, a fee, or a combination on health insurance products will have an impact on overall cost – but how this affects costs will depend on the size of the workforce and what the employer wants. It is crucial employers ask about the adviser’s charging structure before they undertake any work.

• While cost savings are attractive, employers should be aware of any negative fallout (including any contractual infringements with staff) should they reduce benefits.

Health insurance benefits need not cost you an arm and a leg if you closely examine the underwriting and charging structure, says Sam Barrett.

A close examination of what you provide your employees in terms of health insurance benefits can result in significant savings, with some companies able to cut a third or more off their premiums.

While the size of your company, the age of the employees and, with income protection, their occupation will have the biggest bearing on premiums, other factors also apply. Mark McLeod, risk benefits manager at independent consultants Towry Law, says: “Life assurance is simple and price driven so the only real way to reduce the premium is to look for a more competitive deal every couple of years. However, there are plenty of ways to tweak medical insurance and group income protection to realise a saving without necessarily affecting the benefit.”

Private medical insurance offers a number of options for cost savings. For example, benefits can be altered without necessarily affecting the two key areas of cover: in-patient, which covers operations and hospital stays, and out-patient, which is for consultations and diagnosis.

As an example, psychiatric cover accounts for between 5% and 10% of the premium, but can often be removed. “You might also want to take out benefits for alternative therapies and maternity cover and review the hospital list you have. Excluding the likes of the Portland and the Cromwell will take between 10% and 30% off your premium,” explains Kevin Jones, new business director at the Jelf Group.

Adding an excess is also effective. These range from £50 to £5,000 and will take between 4.5% and 75% off a premium. “Most schemes apply the excess once per employee per year, but if you alter the contract so it applies per claim this will increase the savings,” says Ronjit Bose, senior manager for product development at Standard Life Healthcare. For example, £50 applied annually gives a saving of 4.5%, but if applied to each claim it takes 6% off the premium.

Group income protection can also be tweaked to cut costs. How much you can remove will depend on your contractual agreement, but you could save up to 60% by moving to a contract with a limited term. For instance Legal & General’s Progressive plan will shave between 20% and 40% off costs. Rather than pay until retirement this has a stepped benefit, giving two years’ cover on own occupation, two on a suited occupation and then an option to stop benefit or pay a lump sum.

“You might also want to consider reducing the benefit level. Just dropping from 75% of salary to 75% minus State benefits can take up to 10% off the premium,” says Vanessa Sallows, underwriting and benefits director for Legal & General group protection business.

While the savings can be high, changing the terms on products can have knock-on effects that may cost your business much more than you save on the premium. “If you devalue the benefit then this can have serious implications for staff morale and retention,” says McLeod.

Rather than tinkering with cover, you can also save a considerable amount of money simply by switching provider, especially on medical insurance. “Competition for business means there’s a huge disparity of price in the medical insurance market,” says Jones. “Insurers will look to attract different types of business at different times, and some will also increase their rates once they have written sufficient business. Considerable savings can be made just by shopping around.”

As an example he says that by moving to a more competitive insurer, he recently saved around £2,000 for an employer with a scheme covering 10 employees.

Some consultants argue that there’s no real need to switch insurers, even when they initially seem uncompetitive. “Insurers will often work with you to improve cover or price,” says Jones. “They don’t want to lose the business so you can often negotiate a better deal without moving.”

How you pay for your health insurance advice is another area where you could cut costs. Consultants either charge a fee, generally an hourly rate, or a set charge for the work – commission, which is included in the premium; or a combination of the two.

Commission rates vary between the products. According to Glenn Laming, group protection sales director at Legal & General, the standard rates for the group risk products are 4% for life and 12% for income protection and critical illness.

For private medical insurance, consultants can expect commission of around 15% initial and a further 5% at renewal. “You might find consultants looking to move schemes where the initial commission is higher but this isn’t really an issue for the group risk products as the rates are flat,” he explains.

With the risk of churn from commission, arguments rage about which form of remuneration is better. For instance, at Towry Law every consultant works on a fee basis. Dion Prideaux-Reynolds, practice manager for the corporate client team at Towry Law explains: “There are some very good commission based advisers out there but because we’re not focusing on the commission we earn when we sell a product we can give a broader service, covering areas such as health screening that do not generate commission.”

Fees aren’t always better value though. On small scheme, paying commission may be cheaper but the opposite is often true for larger schemes. As an example, Prideaux-Reynolds recently rebroked a scheme for a new client, saving it £200,000, half of which was a result of moving from commission to a fee.

The situation on consultant remuneration will get clearer though. The Financial Services Authority is currently consulting on how consultants are paid for advising individuals and this is likely to filter through into the corporate arena.

But, with change unlikely for some time, Laming has the following advice: “Consultants should explain their charging structure before they undertake any work on your behalf, and provide you with details of their remuneration once they make any recommendations. If they don’t, ask for it.”

Using life assurance to reduce the cost of a spouse’s pension

Changes to pensions, which were introduced in April 2006, have made it much more cost-effective to use life assurance as a means of securing a spouse’s pension.

“The relaxation of the rules around life assurance means you can put in place much higher levels of life assurance. So, rather than fund a spouse’s pension equivalent to a percentage of salary, you fund a lump sum payment by increasing the employee’s life assurance,” says Vanessa Sallows, underwriting and benefits director for Legal & General group protection business.

When the employee dies, the life assurance payout will go to the trustees who can then use it to purchase an annuity for the spouse. “This shift can result in a saving of between 20% and 30% depending on the age of the employee and the level of cover required,” Sallows adds. “Additionally, as the trustees can shop around for the annuity, better rates are available than with the old funded pension route.”

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