Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance

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

Your article was successfully shared with the contacts you provided.

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

Unfortunately, our industry has historically limited itself to selling a product. We have to become more creative at starting a conversation and helping people see that need. One way is to encourage them to take advantage of quoting systems and calculator tools that give them a safe place to experiment with financial assumptions. Aggregators like and can also be very instructive, helping people take a more expansive look at their financial situation and consider what they’ll need to live comfortably into retirement.

One size does not fit all, especially when the differences between generations have never been more pronounced. While more than half of consumers still prefer to buy individual life insurance in a face-to-face transaction with a financial professional, we know that Generations X and Y are less inclined to want face-to-face contact for shopping and have stronger preferences to buy online. 

A mix of distribution channels will play a significant role in our ability to broaden our reach to consumers.

Making the most of technology

Technology can be used to move away from the traditional approach of selling based on age, life-stage and trigger events and more towards engaging consumers at any stage of life. A good case study on this mixed distribution approach is Lifenet Insurance Company in Japan.

Their business model is based on engaging consumers through traditional and social media, direct consumer contact and simplifying the user experience. From the time of its IPO in March 2012 the company grew to 190,000 in-force policies by October 2013.

Another trend making its way to the US is the use of automation. The ability to underwrite in real time is becoming a key differentiator. This is certainly true in the UK and Asia where it is absolutely necessary to have this capability to attract new distribution partners. In the UK, South Africa, Asia and Australia, one-half to 80 percent of life insurance is assessed automatically. And, while the US lags behind these countries, consumers are demanding greater speed and ease, prompting insurers to further digitize application, underwriting and issue.

The benefits of innovation are considerable. Consider the difference in the conversation between the old model and the new model. Under the model we’ve always used, we talk to an applicant in a restrictive way:

“Thanks for filling out that app, now let me just stick this in your arm, look the other way, wait 60 days, and maybe we’ll give you a policy.”

Simplified underwriting and predictive analytics help turn the conservation to one of possibilities, options and partnership:

”Now that you are applying for protection, let’s run some data on you to remove certain tests, and speed up the process.”

Or like this:

“You haven’t applied for protection, but based on what we know about you, we will pre-approve you and make you an offer.”

If we can find ways to engage consumers by understanding and developing solutions around their needs, we will have a positive impact on purchase behavior and start to narrow the protection gap.

Neil Sprackling is president of Life & Health at Swiss Re American Holding Corp.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.