In the context of life insurance and/or living benefits in Canada, “rate banding” refers to the method of pricing insurance coverage based on specific ranges or bands of the coverage amount. These bands categorize coverage amounts into different tiers, each with a corresponding price per unit of coverage. Generally, the higher the rate band, the lower the price per unit of coverage, making it more cost-effective for clients to purchase larger amounts of insurance.
Key aspects of rate banding include:
Tiered pricing
Coverage amounts are divided into bands, with each band having its own pricing structure. As the coverage amount increases, it moves into higher bands that typically offer lower rates per unit of coverage.
Economies of scale
Higher coverage amounts benefit from reduced rates, encouraging clients to opt for larger policies.
Incentive for larger policies
By offering lower rates for higher coverage amounts, insurers incentivize clients to purchase more comprehensive policies.