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This insurance ‘deal’ might cost more

Last reviewed: July 2011
Illustration of an umbrella with scissors cutting dollar signs out of it
Illustration by Eric Westbrook/Getty Images

If you're a member of an association such as AARP or the Elks, you've probably seen the pitches for auto, health, homeowners, or life insurance. The ads sometimes feature claims that the policies offer big discounts for members and don't require medical exams.

But when Joseph Hasper, a retiree in Franklin, Tenn., checked out the promise of a "big deal" for Elks members of up to a 15 percent group discount on auto and home insurance from MetLife, he was shocked to find the opposite of a discount. The rate quoted was 15 percent higher than what a local MetLife agent had offered him only days before, Hasper says. MetLife did not comment.

Insurance companies get a good deal from associations because the group members are a ready list of prospects, which can reduce marketing costs. Endorsement of consumer (or small-business) insurance products is a good deal for associations because it can provide royalties from policies sold and attract new members or keep their current members happy.

But how good a deal do dues-paying members get? Association-sponsored, or "affinity," insurance might not be a great bargain for consumers. Here's why:

You might not get a discount

"There really isn't any discount on life and health insurance because premiums have to be actuarially justified," says Denise Friday, president of the Professional Insurance Marketing Association. Rates are based on loss risk, not membership status. The same is true for disability insurance, a leading type of association coverage, and dental plans.

Auto and homeowners insurance premiums must also be actuarially justified. Some of the reduced sales costs from affinity marketing might be passed on to members as a discount. But an individual's discount is purely hit or miss because personal risk factors can weigh more or less heavily in the rate calculation.

For example, two Consumer Reports staffers compared affinity quotes with their own coverage. The same car insurance from AAA would have cost one reporter $152 more a year, or almost 14 percent. An AARP policy from The Hartford would have saved an editor $109 a year, or 3 percent.

An association quote "may be the best rate that the affinity insurer has to offer you, but it's not necessarily the best rate you can get in the broader marketplace," says Brad Cooper, senior vice president of operations at InsWeb, an insurance-shopping site.

You might not qualify

Members generally don't gain any special advantage in qualifying for coverage. But what they could get is an offer of group life insurance, which might not require a medical exam. Group premiums can cost significantly more than individual rates because underwriters have to factor in "adverse selection"—a greater likelihood that less healthy buyers will be attracted by the no-examination rule.

How much higher can group rates be? That varies. For example, a $1 million, 30-year rising-premium CPA Life Plan policy, issued by Prudential through the American Institute of Certified Public Accountants (AICPA), would cost a male policyholder an estimated average monthly premium of $625 (with a "select" risk rating) to $1,000 (if he was a standard risk) from age 50 through 80.

By comparison, a $1 million, 30-year-term, fixed-premium individual life insurance policy would cost a 50-year-old male between $250 a month (if he had a "preferred plus" risk rating) and $500 a month (with a standard rating), says Byron Udell, founder and CEO of AccuQuote, an Internet brokerage.

A Prudential spokeswoman says that ease of obtaining coverage is important but that the AICPA also offers individually rated life policies with "competitive" rates and that require a medical exam.

Insurers might still weed out the highest risks in a given group by requiring applicants to answer a "few simple questions." The wrong answers disqualify around 10 percent of applicants, Udell says.

A subsidy for associations

To form a marketing relationship with you, insurers pay royalties or fees, which "produce substantial revenues for the sponsoring associations," according to a 2003 study, the latest available, by the American Society of Association Executives. For example, AARP Services, the for-profit arm of the nonprofit membership organization and a big player in affinity marketing, collected almost $657 million in royalty revenues from the sale of insurance and other products and services in 2009.

That means your premiums don't just pay the cost of your insurance. They also provide a subsidy to your association that averages 3 to 6 percent of premiums but can run as high as 29 percent. What do members get for that? In the 2003 study, about two-thirds were satisfied; the most common complaints were about premium increases, slow or inadequate claims settlement, and inadequate coverage.

What you can do

Don't assume your group's insurance offering is the best deal. Comparison shop and talk to your financial adviser.

  • For auto insurance, check whether your state insurance department provides rate comparisons. Go to www.naic.org/state_web_map.htm for a link to your state's agency.
  • For auto, home, and life insurance, compare multiple companies online at AccuQuote, Answer Financial, FindMyInsurance.com, Insure.com, InsWeb, NetQuote, and SelectQuote.