2013 Voluntary Benefits Special Report

Life insurance: Filling gaps in knowledge and coveragen

How agents can help consumers overcome under-protectio

By Michael J. Moody, MBA, ARM

Some of the negative effects of the recent financial crisis are only now manifesting themselves. A key issue is the inadequate amount of life insurance protection, particularly in the United States. This is the subject of a recent report from Swiss Re.

Titled The Mortality Protection Gap in the U.S., the report offers insight into the severity of this problem. Milka Kirova, senior economist at Swiss Re and co-author of the report, remarks: "This inadequate mortality protection is causing genuine financial hardship." In fact, the report indicates that "many people are driven into poverty after the loss of a breadwinner" because of the lack of adequate life insurance.

State of the market

The Life Insurance Marketing and Research Association (LIMRA) monitors trends in the life insurance and financial industries, and some of its recent findings show clear needs for both individual and group life coverage that create opportunities for agents and brokers.

A LIMRA study found that: "Three in ten U.S. households have no life insurance at all." The study also found that in 2010: "Only 44% of families held individual life insurance, down from 62% in 1984." Further, the study noted: "Employer-provided group life insurance was available for only 49% of households in 2010, compared to 54% in 1984." Overall, the LIMRA study reported the status of the U.S. life insurance market "stands at a 50-year low."

Dwindling sales of life insurance and increased policy lapses "mirror the declining trend in life insurance ownership," Kirova observes.  According to Swiss Re, the protection gap was a staggering $20 trillion in 2010.

Kirova cites a key finding of the study that captures the dilemma faced by many American families. "While consumer awareness of underinsurance has actually increased, and many families realize they need more insurance, it's just not happening," she says. According to the study, she says, "Budget issues are reported as the main impediment to buying more insurance." Other drivers Kirova points to are:

• Lower investment income—Today, more life insurance is needed just to maintain a survivor's living standards, primarily because declines in investment rates and returns require the purchase of higher multiples of coverage to maintain the same standard of living.

• Higher debt levels—In addition to a drop in average real wages, Kirova remarks, "Debt levels from 2001 to 2004 rose by about a third in real terms." Although the levels of increases were lower from 2004 to 2007, she notes, "Debt levels in constant dollar terms were still about 40% higher in 2010 than in 2001."

• Declining financial assets—The amount of available financial assets declined by more than 10% from 2001 to 2004. This trend continued for the entire decade, thus "weakening consumers' available asset balances even further," Kirova says. As a result, she notes, on average, "Available assets in real terms were 16% lower in 2010 than they were in 2001, thus contributing dollar-for-dollar to the increase in the protection gap."

• Less life insurance—Life insurance coverage "for households with a primary breadwinner under age 55 fell by about a quarter in real terms between 2001 and 2010." In 2004, LIMRA projected that "nearly 80% of U.S. households headed by an under-55-year-old were covered by some type of life insurance policy." By 2010, however, ownership by this group had declined to about 70%, meaning that three in ten households in this group have no life insurance at all.

Taken in total, Kirova says, these statistics show that "The contraction in the number of householders with life insurance not only reflects the financial pressures of tight family budgets and decline of employer-provided coverage, but also the relatively low priority consumers attribute to life insurance versus other financial needs."

Vital role for agents

Agents and brokers, Kirova believes, can play a vital role in raising consumers' awareness of the life insurance protection gap and, in turn, can profit by offering products to close the gap.

"Research shows that consumers who have even limited face-to-face contact with an agent during the process are more likely to actually purchase life insurance," Kirova comments.

Because life insurance is not a "top of mind" product, she says, "It is critical for agents to actively help consumers understand the value of protection products and work out how life insurance can fit into their budgets."

An effective way for agents to get the message across, Kirova says, is by sharing the personal stories of real-life beneficiaries. Consumers react favorably to "first-hand narratives that help them connect with the idea of life insurance, particularly if the account includes details on what insurance enabled survivors to accomplish and what else they could have done had their coverage been higher."

What's more, Kirova points out, "Agents and brokers can also help reshape consumers' perception of their ability to afford life insurance." She suggests "showing 25- to 39-year-olds that their family can maintain its lifestyle after a tragedy for less than the cost of a daily cup of coffee or monthly Internet access."

As part of promoting awareness of life insurance needs and products, Kirova says, "Agents and brokers also have a role in helping to remove the language barrier that exists between consumers and the insurance industry." She points out that much of the language used in life insurance today is "as old as the industry itself," dating back several hundred years, "and it is very much for and about insurers, not their customers."

Trying to interpret policy language causes many consumers to experience frustration, confusion, anxiety and even boredom. Agents and brokers, Kirova says, can use this as an opportunity "to actively engage in improving the communication with consumers by making it more user-friendly and customer-centric."

Nowhere is this language barrier greater than among younger consumers. For example, another study found that members of Generation Y were likely to associate the word "agent" with the FBI; "protection" with birth control; and "policy" with general rules rather than with insurance.

Additionally, for many consumers, much life insurance terminology and many concepts are associated with negative emotions. The Swiss Re report states that, as "more and more baby boomers retire, insurers and agents/brokers will increasingly need to reshape their selling strategies to attract a new generation of consumer."

The aging of the boomer generation presents another problem for the insurance industry, Kirova observes. "It is well known that the 'face-to-face' sales channel has to confront the challenge of a graying sales force. In 2011, 70% of independent agents were over 45 years old." To build and maintain a sales force of producers who can communicate with younger consumers, agents and brokers must "be more proactive in attracting, empowering and motivating a new generation of insurance agents," Kirova says.

Challenges = opportunities

For agents and brokers who want to expand their practice into life insurance and employee benefits, the issues outlined above offer an ideal opportunity. As the facts and figures cited in the Swiss Re report make clear, a significant proportion of Americans either lack life insurance or do not carry adequate protection.

Among the strategies outlined by Kirova, the top priority is to educate consumers and to communicate insurance terms and concepts in a way they can understand. "The conundrum suggests that the onus is on agents and brokers to do more to educate consumers and help them fit life insurance into their lives and budgets in order to combat the growing protection gap," the report states. "Agents/brokers frequently play a pivotal role in bringing home the message to potential buyers about the value and affordability of life insurance."