Understanding the protection gap: It's like peeling an onion

If you want an illustration of the current state of life insurance sales, look no further than Generation Y, the largest generation group in the US. When they hear the word “agent” they think of the FBI. When they hear “protection” they think of birth control. “Policy” to them means general rules, not an insurance product.

Those are just some perceptions. Now, here’s the reality. The gap between the amount of life insurance Americans own and the amount they need is immense and growing.

As Swiss Re has reported, the US has an estimated $20 trillion mortality protection gap, which translates to an average $378,000 per household. That’s the difference between the resources available and the resources needed to maintain the living standard of survivors after the death of the primary breadwinner.

Life insurance ownership is at its lowest level in 50 years; in fact, three out of ten households don’t own any life insurance. Since 2007, the volume of new individual life sales has fallen annually by five percent and lapse rates are significant, even though the US has the most affordable life insurance when compared to any other developed country. Yet, in 2010 LIMRA reported half of all households realized they were underinsured.

Trying to understand this protection gap is like peeling an onion: There are many layers and all the complexity and seemingly elusive opportunities can bring tears to your eyes. We know why people don’t buy coverage. And some of those factors are beyond our control, such as declining income, shrinking investment returns and increasing debt.

However, some of the reasons are within our control, like the perception that life insurance is too expensive and difficult to understand. To address those issues, our industry is attempting to make buying life insurance faster, cheaper and easier. But in our effort to engage the middle market, we’ve unintentionally created more complexity and ambiguity — added more layers to the onion.

By reducing premiums, creating guaranteed products, along with more restrictive underwriting classes and simplified underwriting, we’ve forced distributors to look “up market” for commissions rather than making products more accessible to the middle market. While we’ve served the affluent end of the market well, we’ve created a paradigm in which the middle market consumer is lost without a map.

Recognizing the opportunity

We must renew our resolve to reach the under-served middle market by agreeing that there is a significant opportunity for all players in the life insurance space. So we need to keep peeling back the layers to get to why people don’t buy life insurance. There, at the core, is the answer: our struggle to innovate when it comes to consumer engagement.

To be fair, our industry is beginning to take steps to attract or “pull” consumers toward a purchasing decision, by tailoring the buying experience to their needs and preferences.

Today’s consumer expects to be engaged, as evidenced by these highly nuanced segmentation strategies. Thanks to the precedent set by the retail and entertainment categories, engagement has become “table stakes” for retailers and service providers trying to get in the game and into the heart and mind of the consumer.

It is true that life insurance is bought, not sold. Before a transaction takes place, the consumer must identify a need. That starts with admitting that their death is outside of their control.

Beyond that emotional realization, a financial need must be identified. This undoubtedly requires a great sense of personal responsibility, which then has to be reconciled with a knowledge of one’s personal finances, social safety nets or other existing solutions. One must recognize one’s own personal protection gap!

Helping people to see the need