Editor’s Note: This is the fifth installment of a six-part series on threats to the independent life insurance distribution channel, running in each issue of Life Insurance Selling through the remainder of 2012. To read previous installments, use the links below.
- Part I: Facing up to a graying producer workforce
- Part II: The impact of a universal fiduciary standard
- Part III: Competing against alternative distribution channels
- Part IV: The dangers of ignoring the middle market
- Part V: Combatting consumer apathy
- Part VI: Emerging technology and the future of distribution
As anyone in the life insurance industry knows, most Americans are dangerously uninsured or underinsured when it comes to life insurance. Many of them are aware they need to buy or boost coverage, but this awareness still doesn’t motivate them to do anything about it.
They are tragedies waiting to happen.
If an uninsured average American — say a 38-year-old parent of two kids under age 10 — were to die prematurely, that’s a tragedy. His or her kids will have to grow up without that parent, and it’s very sad. But beyond the emotional damage in a case such as this is the long-term financial damage that premature death creates. If that parent had no life insurance, how are those left-behind family members expected to maintain their lifestyle with that loss of income or caretaking? In the vast majority of cases, they can’t. The hardship the death creates doesn’t go away.
The average American doesn’t expect to die prematurely. But accidents happen. Diseases strike. Most realize their death would create significant financial hardship for families left behind, but still, they gamble that premature death will never happen to them.
Why? Lots of reasons.
- They are focused on other financial priorities.
- They don’t know how much coverage they need and overestimate its cost.
- Nobody is asking (agents) or telling (parents) them to buy life insurance.
- They don’t properly understand the need for coverage.
- They distrust insurance companies and insurance agents.
- No one likes to think about or plan for their own demise.
- They procrastinate.
Research consistently supports the premise that most Americans are indeed uninsured or underinsured. LIMRA, a Windsor, Conn.-based association that provides research, consulting and other services to insurance and financial services companies, released a well-publicized study in August of 2010 revealing that ownership of individual life insurance had fallen to a 50-year low.
The Trends in Life Insurance Ownership study, conducted every six years, found that only 44 percent of U.S. households have individual life insurance. The number of U.S. households that have no life insurance whatsoever increased to 30 percent of households (35 million) from 22 percent in the previous study in 2004. As of 2010 there were 11 million fewer American households covered by life insurance compared with six years earlier.
“A majority of families either have no life insurance or not enough, leaving them one accident or terminal illness away from a financial catastrophe for their loved ones,” said Robert Kerzner, CLU, ChFC, president and CEO of LIMRA, in a press release accompanying the study.
While LIMRA isn’t due to update its Trends in Life Insurance Ownership study again until 2016, there is no indication the situation has improved since 2010. According to the 2012 Genworth LifeJacket study, released in October, even fewer adults own life insurance today, and those who do own it have less coverage compared with last year. The LifeJacket study found 52 percent of adults 18 and older are uninsured, which adds up to more than 118 million Americans.
“Business as usual” when it comes to how the industry approaches consumers isn’t working very well. Has life insurance become irrelevant to younger Americans? Is it evolving into a luxury reserved for affluent clients? How can the industry effectively reach consumers to correct many of the misperceptions people have about life insurance? What can be done to make Americans think of life insurance as a “moral imperative,” as LIMRA’s Kerzner has said?
A closer examination of some of the common reasons Americans say they don’t buy life insurance — or put off buying life insurance — can lead to some ideas about how the industry can react to the issue.
Consumers are focused on other financial priorities
According to the nonprofit LIFE Foundation and LIMRA’s 2012 Insurance Barometer Study, nearly a third of all consumers believe they need more life insurance.
The top reason uninsured or underinsured consumers cite for not obtaining more life insurance is that they have “other financial priorities.” That was mentioned as a factor by 85 percent of survey respondents.
The study found consumers are more concerned with paying their mortgage or rent (31 percent say they are extremely or very concerned) or losing money on investments (26 percent) than they are with issues that speak to the need for life insurance. Having enough money for a comfortable retirement continues to be consumers’ top financial concern (50 percent say they are extremely or very concerned).
It is reasonable to consider that the recession has forced many people to put things like securing life insurance on the back burner as they attend to what they perceive as more immediate needs, be it covering basic living expenses, trying to squirrel away more money for retirement or contributing to their children’s college funds. But many middle-income consumers who could afford coverage would rather buy something tangible, like a new flat screen TV or the newest Apple gadget, than put that disposable income toward life insurance.
Life insurance is not top of mind
The life insurance industry realizes people are not being educated about why they need life insurance and why owning it needs to be higher on their priority list. But how to go about correcting the problem is another matter.
“One of the things I think is a huge challenge to the industry and probably particularly to the independent channel is a need for more financial literacy programs and awareness in the public eye,” says Steven A. Plewes, ChFC, principal of Advisors Financial Group in Gaithersburg, Md. “People are aware of life insurance. If their financial advisor recommends it, they are inclined to buy it, but it’s probably not top of mind for most people.”
He says the nonprofit LIFE Foundation has done a good job with its Life Insurance Awareness Month campaigns each September, but he thinks more could be done. “There needs to be more of a grassroots effort — producer groups and marketing organizations can do things locally to raise awareness and to improve financial literacy,” Plewes says.
“It seems like something that would be beneficial to the industry as a whole to come together and say, ‘How can we all look at this big picture and create a fertile marketplace for insurance?’ It would be advantageous for the industry as a whole to come together and figure out a way to raise public awareness of the importance of insurance in general.”
Raising awareness is only part of the issue. The industry also needs to dispel misconceptions and perhaps even fundamentally change the way it approaches consumers.
James O. Mitchel, Ph.D., CEBS, who is the vice president, developmental research at LIMRA, says if the industry wants more people to buy life insurance, it needs to do a better job of framing the information it presents to them. He says the focus on promoting financial literacy or providing the public with more detailed information and disclosures has not been effective in addressing the uninsured problem.
“You need to do things differently. You’ve got to present the risk so that it’s a little more emotional than factual,” Mitchel says. “I think we’ve fallen into the trap in the industry of just relying on the numbers and the information. The products are complex, we’ve got all these illustration tables, we can project things out, and we get comfortable trying to rely on that. That’s not what’s going to get people to act. You’ve got to have some kind of emotional reaction to it.”
Mitchel mentions a case study about how a credit card company tried to help out 7,000 of its customers who were in danger of slipping into delinquency. They offered this group a free online financial literacy course. Out of the 7,000, only 28 logged on to the website, and just two actually completed the course. “People don’t want more information,” Mitchel says. “That’s not going to change what they do. They either know enough or think they know enough that just information is not going to change it. You’ve got to change your appeal. It’s not an information approach that’s going to get somebody to do something.”
The change he says is needed is more of an emotional approach. The LIFE Foundation’s realLIFEstories, showcasing tear-jerking stories of real families who benefitted significantly from life insurance, illicit such an emotional response, and Mitchel says these types of tools need to be utilized continually.
“We just don’t keep this emotional thing out there as much as we should. We bring it up occasionally, but we don’t make it a constant of what we’re doing,” Mitchel says. He adds that the LIFE Foundation doesn’t have the financial capability to make a significant marketing play nationally, but its resources like realLIFEstories can “move the needle” with producers who then can make an impact in their communities, if they’ll keep at it.
Mitchel says the industry needs to find a way to share effective sales approaches that resonate with consumers. “There are a lot of producers out there that are very good, but there are a lot that aren’t. How do you get those ideas of the producers that are doing a good job out to the rest of them that maybe haven’t seen that?”
People don’t understand life insurance
Most life insurance policy owners neither read nor fully understand their policies, and they have little interest in voluntarily acquiring additional information. Getting people who don’t own life insurance to understand what they’re being asked to buy is another big challenge.
In her 1979 book, “Morals and Markets: The Development of Life Insurance in the United States,” author Viviana A. Rotman Zelizer wrote, “Consumers lay the blame on the companies, complaining that their operations are abstruse and their contracts are unintelligible. In 1974, a New York Times article announced that while the Bible scored 67 in a readability test, and Einstein’s relativity theory scored 18, insurance contracts scored a 10 or less. The unnecessary complexity of modern contracts certainly discourages careful reading and contributes to public apathy.”
Remember, that previous paragraph was written in 1979. Today, people still don’t understand life insurance, and that unfamiliarity can scare them away.
People who know they need life insurance coverage usually don’t know how much coverage they need, and tend to seriously overestimate how much it would cost. The 2012 Insurance Barometer Study revealed that consumers believe life insurance costs nearly three times the actual price, which undoubtedly deters them from getting the coverage they admit they need. Beyond “other financial priorities,” the second most common reason survey respondents mentioned for not obtaining more coverage is that life insurance is “too expensive.”
Survey respondents were asked to estimate the annual cost of a 20-year, $250,000, level-term life policy for a healthy 30 year old consumer. The actual cost is roughly $150, but Americans estimate the cost at $400. Younger adults, who are most likely to qualify for preferred pricing, overestimate the cost by nearly seven times the actual cost.
“If someone offered to sell you a gallon of milk for $10, you would likely choose to spend your grocery budget on other necessities, knowing that the actual cost is closer to $3.50,” says Marvin H. Feldman, CLU, ChFC, RFC, president and CEO of the LIFE Foundation. “If people think that something is too pricey, they often won’t give it a second thought. The fact is, the cost for basic term life insurance has fallen by about 50 percent over the past 10 years and has never been more affordable. Owning life insurance is fundamental to a family’s financial security, and our industry needs to do more to help educate people about the true cost of protecting their loved ones.”
People aren’t being contacted
A generation ago, it was not uncommon for fathers to introduce their sons, about to leave the nest and start their own household, to their own life insurance agent. Many fathers even introduced their agent to their daughters’ new husbands, with the intent of making sure the new man in their daughter’s life was serious about protecting her.
It may still happen to some extent today, but not nearly to the extent it did back in the era of “Father Knows Best.” That puts even more responsibility on the industry to proactively reach out to consumers, something the industry is having a hard time accomplishing, especially when it comes to agents contacting middle-market consumers. Another alarming finding from the 2010 Trends in Life Insurance Ownership study was that nearly 8 in 10 households currently do not have a personal life insurance agent or broker, and most say they have never had a relationship with an agent.
On top of that, LIMRA’s 2011 Life Insurance Buyer/Non-buyer study found that only 39 percent of U.S. households recall having an opportunity to buy life insurance in the past two years.
With a graying (and shrinking) producer workforce, there just aren’t enough producers out there making calls and knocking on doors. And many of those that are active are focusing on the affluent market. If a middle-market consumer wants to look into life insurance, he or she is likely going to have to do it proactively, which goes against the old adage, “Life insurance is sold, not bought.”
Another viewpoint to consider is that today’s consumers just aren’t as concerned about dying as they used to be. As life expectancies have lengthened, the average person’s worries about death have diminished. A 2010 Allianz Life Insurance Co. study found 61 percent of baby boomers fear outliving their money in retirement more than they fear death. LIMRA’s Mitchel says you could argue that the next generation just doesn’t have that sense of need for life insurance that previous generations have always had. And a big part of that is due to medical advances.
“Twenty or 30 years ago, the word ‘cancer’ was an instant death sentence. We’ve gotten a whole lot better now where, with cancer, people have more of an ‘I can beat this!’ attitude,” Mitchel says. “Is that part of the apathy?”
Daniel Mulheran, president of retail life distribution at ING U.S. Insurance, says he doesn’t think consumer apathy toward life insurance is really a problem. “In fact, half of U.S. households say they do not have enough life insurance, the highest proportion ever, and half of those households say they plan to purchase life insurance in the next 12 months,” Mulheran says, referencing LIMRA’s 2010 Trends in Life Ownership study.
“A big part of the problem is that consumers don’t know where to go to get life insurance, and no one is calling on them. There is perceived consumer apathy, which over time, the industry can change by fixing our side of the equation and make it easier for consumers to learn about and acquire the life insurance they need.”
Mulheran mentions INGforLife.com as one example. INGforLife.com is an interactive website that helps consumers understand the need for life insurance, learn about different types of life insurance, calculate the amount of life insurance they should consider, and even make the decision to buy. Many carriers as well as the LIFE Foundation offer similar online tools designed to help consumers and direct them toward coverage.
While a prolonged shortage of active producers means most consumers shouldn’t expect to hear from a life insurance agent any time soon, the flip side is that producers who are active have little competition and a huge, untapped pool of prospects who need what you’re selling. They need you to spur them to action to ensure they have the peace of mind and financial security that life insurance offers.
For more from this series, see: