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.”