The Life Insurance Industry has an Uphill Battle to Save Itself but a Little Creativity and Innovation Would Help
The life insurance industry has taken it upon itself to declare September as “National Life Insurance Month.” (That’s a little bit like the funeral parlor industry declaring “National Burial Month.”) It is not clear if “Life Insurance Month” — despite all the “Whereases” and “Be it Resolved” statements in its proclamation — is designed to be a celebration of, or a memorial for, life insurance. (How does one celebrate life insurance, anyway?)
It is clear – even to the life insurance industry – that the market for its primary product has been steady declining for 35 years. According to an article, “More Go Without Life Insurance” in The Wall Street Journal (August 30, 2010), “Nearly a third of U.S. households have no life insurance coverage, the highest percentage in more than four decades …” The article went on to point out, “About 35 million U.S. households neither own their own life insurance policies nor are covered under employer-sponsored plans, up from 24 million or 22% of households, without coverage in 2004 …”
Recently released figures show that in 2009, insurers issued 9.4 million individual life policies and that is about one million fewer than in 2004. At the same time, it was reported that only 44% of households have life insurance – other than employee sponsored group insurance – and this is down from 50%.
After more than three decades of steady decline in life insurance sales the insurance industry has finally recognized the problem and has determined that something must be done to reverse the trend. Dum-de-dumb! While the industry’s intentions are understandable and life insurance is a good product that can play an important role in an individual’s total financial plans, the chickens may be out of the coop and the opportunity may have lapsed.
The Industry Faces a Sisyphean Challenge
The life insurance industry faces a tough, up-hill battle—worse, perhaps, than anything Sisyphus ever tackled. First, they must convince the consumer that they need the insurance product; second, they’ve got to figure out ways to make the product available. Sadly, both the consumer need and the product delivery systems are lacking. To make life insurance once again a go-to product that consumers believe is fundamental to their financial requires creativity and innovation—two traits few observers use to describe the life insurance industry.
There is no single reason for the downward spiral of life insurance sales. Rather, the decline is due to a confluence of several factors that have come together to create a perfect storm of lost sales. If the life insurance companies are going to reverse the slide in the sales of life insurance (and their own future) they will need to successfully tackle three crucial challenges. These are:
- Extended longevity and changed demographics.
- Old products that are designed to meet the needs of the last century, not this one.
- A significant decline in the distribution system for life insurance.
Changes in Longevity and Life
Probably the most significant achievement of the past century was the extension of human longevity. At the start of the 20th century, the average life expectancy of a male in the U.S. was 46 years. By the end of the century it was approaching 74 years. That dramatic expansion creates huge, but manageable problems for the industry.
Life insurance was designed to “protect against the economic cost of dying young.” The economic cost of dying at age 40 – when the families are still young and mortgages are to be paid – is more expensive than dying at 70, when most family and financial obligations are satisfied. So long as people were “dying young,” life insurance was a needed and valued product. However, as life expectancy extends, individuals are less concerned about dying young and the motivation to buy life insurance declines
Advancing life spans, when combined with the dramatic demographic changes of the past 60 years, creates a double whammy to the perceived need for life insurance. In the middle of the 20th century – when life insurance sales were at their apex – most families had a single income earner; and that was the male. If the male were to die, even if the surviving wife could work, income earned by women was significantly below that paid to men. (Even in the same job!) As a result, there was a definite, recognized need to replace the income of the male and life insurance did so admirably well.
Today, the demographics have drastically changed. Not only are families smaller, but they also tend to be started later and the vast majority are now two-income families (a measly 7% of U.S. all U.S. households consist of married couples with children in which only the husband works). Moreover, it is not unusual for the wife’s income to equal or greater than her husband’s take-home pay. It does not mean there would not be costs and challenges should either one of the bread-winners die, but the need is not perceived to be as critical as it was 60 years ago.
Thus, the combination and extended longevity and demographic changes work together to diminish the attractiveness of that was designed for needs that don’t exist today.
New Needs Require New Products
The only way the insurance industry is going to turn around life insurance sales is to make the product more about life than death. While people still do die at young ages, it is no longer the primary concern for individuals. People today are much more concerned with the cost of “living too long” than they are of “dying too soon.” Instead of offering products that “reward” people for dying, the insurance industry must design products that “reward people for living.”
The easiest thing to do is design a new form of life insurance, but the most difficult thing for the life insurance industry is to decide to do it.
Life insurance products can be designed to meet the potential financial calumniates of life, i.e. disability, major illness or needs for cash as well as providing a vehicle to assure a stable retirement; and at the same time provide a lump-sum benefit in the event of premature death. The key to the attractiveness and saleability of the product is the benefits for living. The death benefit becomes an ancillary, “oh-by-the-way” benefit.
If You Make It – Will There Be Anyone To Sell It?
As difficult as it will be for the insurance industry to change its life, possibly the most difficult challenge facing the life insurance industry’s desire to resuscitate the sale of life insurance is finding someone to sell the product. Life insurance is a personal, individual product that must be sold on a face-to-face basis. Except for cheap term insurance (which is less profitable and companies prefer not to sell it), life insurance does not lend itself to direct-response or Internet sales.
Consistent with the decline in sales of life insurance has been decay in the agent distribution system of the insurance industry. Fifty years ago almost 90 percent of life insurance sales were made by a large, well trained, professional system of agents who were controlled by and beholden to the companies. The insurance industry had invested millions and millions in building what many considered the most powerful distribution system of any industry.
Due to a variety of factors – mostly centered on ill-advised efforts to reduce costs – the life insurance industry in the 1980s began to dismantle its distribution system. This was a short-term decision for which the companies are now paying a steep price. Limra an industry-funded research group has reported that the number of company-affiliated life insurance agents has dropped by one-third. And, the numbers continue a relentless decline.
This leads to the question: If an insurance company develops an attractive new form of life insurance, but there is no one to sell it, is it still a good product?
And the Moral of the Story …
The life insurance industry is dying a slow, painful death. It need not happen. Life insurance can once again take its place as an important part of an individual’s total financial life. For this to happen, however, life insurance companies must totally change their way of life.
A properly designed new form of life insurance that rewards the consumer for living, rather than dying, will better meet the modern needs and objectives of the individual and become an attractive purchase.
Recognizing that life insurance – no matter how attractive the product may be – is a product that is not bought, but must be sold, the life insurance industry must once again invest in, manage and control its distribution system.
These are difficult and challenging changes for an industry that views every change as a threat. But, it is obvious that these changes must be made if the life insurance industry is to survive. One thing is very clear: Declaring September as “National Life Insurance Month” is an unwitting acknowledgment that a new life is needed, whether the industry realizes it or not.
P.S. For your own personal copy of the National Life Insurance Month proclamation suitable for signing by your state governor and framing on your bathroom wall, click here.