Sellling life insurance has always been a relatively slow process. The average life insurance agent does not sell even one policy a week. There’s lots of prospecting, missed appointments, presentations, etc. that occur to obtain the typical month’s three or four sales. That life insurance is sold, not bought, is a most common refrain. And, seemingly, nearly everyone seems to accept that, because of human nature, it will remain this way forever.
Surveys also typically reveal that households are significantly under-insured. Market researchers often report that approximately one-third of families intend to buy from a life insurance agent during the next 12 months, but seldom do more than five percent of households buy a policy in any given year. Apparently, five out of six consumers, again, because of human nature, just never get around to meeting with an agent, and even of those that do only some could be considered appropriately insured.
Human nature, however, is seldom accepted as an insurmountable obstacle in other arenas. What if there were ways to motivate individuals–in particular, parents–to make it be in their own best interest to actively address their life insurance needs? What if family breadwinners had a real impetus to be buyers of life insurance?
For example, what if the amount of life insurance a breadwinner has could be used as a proxy for the value of a potential award his/her family would receive in a wrongful death lawsuit? Or, what if dependent exemptions on tax returns were conditional on having some “appropriate” level of coverage? Or what if a young couple were required to present a certificate showing some “appropriate” level of coverage before they could take their first baby home from the hospital?
Although these ideas may seem ridiculously-impractical or radical (such are the labels typically applied to any novel idea, even those ideas that eventually become accepted for their wisdom), principles of economics and ethics can be shown to support these proposals. Might it not be a good time for the life insurance industry to do so as well? In fact, while there is no expectancy that these ideas would be implemented any time soon, wouldn’t having public discussions about such ideas be useful?
A Modest Proposal’s Logic
One can only rightly ask another to do that which he or she would have done on his or her own. In a wrongful death lawsuit, the claim for damages, aside from punitive factors, is largely tied to the financial loss suffered by the survivors–the deceased’s future paychecks need to be replaced. This calculation is similar to the needs assessment that agents perform for their clients. Premature death, though, is much more likely to occur in a multitude of other ways (heart attack, brain tumor, etc.) than by someone else’s negligence. Consequently, claiming that one’s family is entitled to $3 million from a negligent party ought to mean, and thereby require,that one had been insured for $3 million so as to appropriately protect against all of the 999 other possible ways of dying prematurely.
Every paid wrongful death claim comes from someone else. For courts to order such awards is analogous to society specifying that everyone act with commensurate risk management prudence (e.g., engage in risk reducing practices and insure appropriately when risk reduction isn’t possible). Wrongful death cases are not supposed to be a winning lottery ticket for the bereaved. Nor is the basic wrongful death claim supposed to be a harsh punishment for the negligent party (punitive claims are a different matter); wrongful death claims are suppose to be compensation. And what better proxy to use for compensation than the value the deceased individual placed on his or her own life? After all, heart attacks and brain tumors are more prevalent causes of premature deaths than wrongful accidents. Don’t we as a society want those bereaved families to be as well taken care of as we want those who survive their breadwinner’s wrongful accidental death?
This proposal is not intended to exactly specify wrongful death awards, but rather to use an individual’s amount of coverage as a proxy or a starting point that could be adjusted based on various other factors (the deceased might not have had sufficient time to have modified coverage after having learned of a wife’s pregnancy or a big job promotion, etc.). Perhaps claims could be limited to two times the amount of coverage one has purchased on his/her own life. Again, the point of this proposal is to more effectively motivate individuals to have a stake/an interest in obtaining an appropriate level of coverage,
so as to make the breadwinner responsible for the value that their loved ones could seek from a premature and wrongful death.
Few really imagine themselves as dying prematurely, and many think that if such a death were to occur, it would necessarily occur in a wrongful accident, and therefore their family could sue the other party for millions. But such thinking is faulty; the chance of dying from a brain tumor or other unimaginable illness is much greater than the chance of dying from someone’s negligent act. It’s a public disservice to allow individuals to maintain such false beliefs.
Changing social norms regarding life insurance is essential to change the inadequate usage of life insurance and the age-old inefficient distribution system. The best way to counter such widespread false beliefs is not with individual agents making individual presentations to clients, but with public education and action. As a society, we require that parents take lots of actions for their children’s well-being (child safety seats, vaccinations, etc.); motivating appropriate life insurance coverage is entirely consistent with such well-founded laws.
Avoiding discussions about life insurance may well be human nature, but that does not mean that it is rational, reasonable, or even good. In many arenas, (social security, mandatory enrollment in 401(k) plans, bicycle helmet laws, mandatory car insurance, vaccination of children, and–quite possibly soon–mandatory health insurance, etc.) laws are passed to require individual responsibility. The wisdom of such laws is widely accepted. While some might argue that mandatory auto insurance is designed to protect others that one might harm, the life insurance situation is entirely analogous; the “other” being protected is actually not just any “other,” but a loved one. All that is required is to view parents as fiduciaries with responsibility to protect their family’s primary asset (his/her future income stream) for the dependents’ benefit. Legislation that: 1) specifies using an individual’s amount of coverage as a proxy in wrongful death lawsuits, 2) limits/reduces dependent exemptions if the taxpayer does not have coverage equal to at least some reasonable multiple of annual income (again variations for ages, etc.), and/or 3) requires a certificate of having recently increased coverage (or already having appropriate coverage) before taking a newborn baby home from the hospital could all be very beneficial. And, again, the point of such legislation is not to criminalize currently widespread parental shortcoming/omissions but rather to speak with society’s best collective wisdom about a subject that requires such.
The benefits of such legislation, in fact, would not just be in motivating family breadwinners to obtain appropriate coverage but would also help to reduce the cost of life insurance coverage. After all, if agents suddenly were selling three or four policies per week, then sales compensation–with its corresponding impact upon product costs–could be reduced. Further reductions in life insurance costs could be obtained if the practices of subrogation were allowed in wrongful death cases. After all, if life insurers could recover all the claims they paid for wrongful accidental deaths from the negligent parties, then life insurance premiums could be further reduced. Moreover, the agony of litigation’s uncertainty and delays could be avoided. Quite simply, more effectively motivating individuals – by using society’s means of persuasion – to make sure that their loved ones are appropriately protected (regardless of how they might prematurely die: illness, accident, or wrongful accident), could really turn family breadwinners into life insurance buyers. And when that happens, everyone will win.
E Brian Fechtel is a CFA, life agent and the head of Breadwinners’ Insurance.