Rate Banding

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 $1,000 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:

1. 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 $1,000 of coverage.
2. Economies of Scale: Higher coverage amounts benefit from reduced rates, encouraging clients to opt for larger policies. This results in overall savings for the policyholder.
3. Incentive for Larger Policies: By offering lower rates for higher coverage amounts, insurers incentivize clients to purchase more comprehensive policies.
4. Simplified Underwriting: Rate banding simplifies the underwriting process by standardizing pricing for different levels of coverage within each band.

Rate banding helps insurance companies manage risk while providing clients with more affordable options for higher coverage amounts. Understanding how rate banding works can help clients make informed decisions about the level of coverage that best meets their needs and budget.