Filed Under:Life Insurance, Life Products

Mind the Gap

How Americans are underinsured by a mind-boggling $20 trillion

As the last few warm days of the year wind down and animals and people alike snap out of their summer malaise to tackle their respective tasks at hand, Life Insurance Awareness Month is also concluding. And if the month-long awareness campaign did its job, as people prepare to vote in a presidential election, make the necessary repairs to their homes for winter and try and end their frivolous summer spending habits, they should also be contemplating the purchase of, or the purchase of enough life insurance.

A plethora of studies, white papers, surveys and polls striving to take the pulse of Americans’ attitudes towards life insurance have been published over the last month. Some of them stirring a surprising sense of optimism in the market, some of them highlighting very tactile hurdles. Some of them reiterating well-known challenges in the industry, some of them bringing to light new ones, some intuitive some, quite the opposite.

Of all the issues facing the industry both internally and externally, the coverage and mortality gap may be the most unnerving while simultaneously being one of the easiest to diagnose and repair.

In late August, just as Life Insurance Awareness Month was ready to begin, Swiss Re published a study, “The mortality protection gap in the US.” The study made a significant splash with its assertion that in 2010, the mortality protection gap (protection gap) in the US was $20 trillion or 135 percent of our gross domestic product. The mortality protection gap is defined as “the extent to which families are insufficiently covered in the event of the death of the primary breadwinner.”

The width and depth of the protection gap is clearly a double-edged sword for insurance companies as well as the agents that sell their products. Obviously one of the first things that one takes away from reading a statistic like that is the notion that the industry may not be doing its job regarding raising consumer awareness about the need for adequate protection. The second thing that one can take away is a little easier for the industry to stomach; the economic environment of the last four years with its high-unemployment and anemic growth is a major precipitating factor to the dismal findings in the report.

Let us first examine the symptom of the protection gap that falls directly on the industry’s shoulders. The Swiss Re study proposes that life insurers are not making a strong enough effort to address the protection gap. A survey that was published in early September by InsuranceQuotes.com found that a major misconception among those with little or no life insurance coverage was that it was “too expensive.”

The Swiss Re report found that nearly four in five underinsured households named lack of affordability as one of the main reasons that they have not purchased more life insurance. The study also found that 80 percent of consumers across all demographic groups overestimate the cost of life insurance. There clearly is a communication barrier that is working to stymie the sales process before it even gets off the ground due to a glaring misconception.

Swiss Re’s report suggests that life insurance can potentially be a rather small cost for many households across the country and the impetus to convey the message is clearly on the industry. Regarding the protection gap, the study states that life insurers should be able to showcase a “unique value proposition” (when compared to other financial products) so that consumers not only buy life insurance, but buy enough to close the protection gap. The study urges insurers to make a “concerted effort” to tackle the gap by doing more on their end to track and follow consumer perceptions and misconceptions while urging life insurers to track the attitudes and behaviors of their potential customers.

The other main precipitating factor of the protection gap is the aforementioned economic milieu that we have been enduring for the last four years and counting. Many have maintained that the economy has played a large role in the protection gap increase that we have seen over the last decade. Beginning with economic ripple effects that were felt immediately after September 11, 2001 and straight through to the present, many Americans have been hit with a perfect storm of declining real income, forced early retirement, rising debt levels, low returns on investments and decimated savings.

The Swiss Re report found that the aggregate protection gap for American households where the breadwinner is under the age of 55 increased by nearly 10 percent in the last decade. However, the trend towards an expanding protection gap began in earnest before the last decade and may very well continue on its downward spiral once our economy and, in turn American households begin to heal financially.

Mark Pfaff, Executive Vice President of New York Life Insurance Company and Head of US Agency feels that the gap is not a new phenomenon blown in and kicked up by the winds of the Great Recession. “We recognize that gap and I would say that gap has always been pretty large and I think that the way you fill that is agents sitting down with families and businesses and having face-to-face and belly-to-belly conversations.”

Mark posited a different theory when asked about the protection gap, the coverage gap and LIMRA’s 2010 finding that life insurance ownership was at a 50-year low in the US. He maintains that part of the blame for the uninsured and underinsured can be placed on the sea change that happened years back regarding career agents.

“Our belief is not that Americans are losing their belief in life insurance, it is that there are not as many agents out there. Companies have moved away from career agency distribution so, if you believe as we do that life insurance is ‘sold not bought.’ There is no one hiring and training career agents like New York Life is and if you ask us why, that is why there is a gap.”

What New York Life has found is that rather than the economic crisis exacerbating the coverage and protection gap, the dire economic times could spur life insurance sales. “This is an emotional product. You buy it because you love people. Everyone has got to make financial decisions and that did not stop during the economic crisis, in fact, what it probably did was escalate the obvious need that you have to make good financial decisions. We have seen record growth in the economic crisis. Policies are up 8 percent on a year-to-date basis. We are creating compelling reasons for the client to want to sit down with the agent when they call.”

Whether the economic crisis is viewed as an opportunity to close the gap or as a reason for its widening, consumer behaviors and attitudes should be carefully watched and quantified in order to boost sales and leave families prepared for when tragedy strikes.

An ING U.S. study released during Life Insurance Awareness Month titled, “Insurance Revealed” found that 78 percent of respondents viewed insurance as a valuable tool for estate and financial planning. Fifty-three percent of those respondents felt that the current economy makes life insurance more important today than any time in the past years. The study also found that although consumers recognize its importance, they do not feel that it is the most-pressing financial purchase that they currently face. Nearly half of those surveyed also said that were “not confident” in the amount of coverage that they had. The ING U.S. findings highlight the difficult situation facing both the industry and consumers and confusion coupled with indecision may be one of the most easily understandable and least debatable factors for the protection gap yet.

Brett Berg, Director, Advanced Marketing for Individual Life Insurance at Prudential feels that tools available on Prudential’s website that assist consumers with calculating the amount of coverage they need are invaluable when it comes to closing the protection gap. However, many of the individuals that need coverage the most, (those that are completely uninsured or those that are extremely underinsured) most likely will not find themselves perusing life insurance carriers’ websites when they get home from working all day.

“We hit that demographic through our distribution channels. We have our agency distribution and we also have a presence in the brokerage marketplace. So, we are not only educating people through our platform but we also seek to get our message out through all of the different distributors that we have and help them help their clients.”

Practically, for both the American public and the industry, it does not matter what the specific cause of the protection gap is. It is irrelevant whether it is a natural trend that started cracking open when carriers shifted away from the career agency model, or whether it was then jack-hammered open by the economic crisis. Or whether the protection gap is indicative of the industry losing the pulse of the public and their dated sales techniques falling upon deaf and cluttered ears. What matters is that the gap begins to close before the notion that not having enough life insurance is okay. This is important to both the vibrancy of the industry and the financial health of the average American family.

 

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