Marketing, Life Insurance, and Behavioral Psychology
There is a definite creep factor to life insurance. Between the overwrought advertisements showing young children missing their daddies and the stereotype of the hard-selling insurance agent (best characterized by Stephen Tobolowsky as Ned Ryerson in "Groundhog Day"), it can seem as though life insurance is an industry that survives by playing on your emotions.
Unfortunately, that assessment of the life insurance industry isn't entirely wrong. Buying life insurance in order to provide for your family after your death is, by definition, an emotional decision.
But that doesn't change the fact that life insurance is a necessity. It's just very difficult to rationally figure out exactly what kind and how much insurance you need when even the most straightforward sources of information will play on your fear of death and your love for your family. Add in the emotional marketing and selling techniques, and it can become even more difficult to navigate.
So how do you approach life insurance in order to make the best decision for yourself and your family? Here are some of the personal and industry pitfalls you're likely to come up against when looking for life insurance, and some methods for sifting through the emotion to reach a rational decision. (See also: Why Women Need Life Insurance — and What to Do About It)
We're Our Own Worst Enemies
According to a recent study by LIMRA, the Life Insurance Marketing and Research Association, 30% of American households — 35 million — have no life insurance whatsoever, and of those uninsured families, 11 million are households with children under the age of 18. This lack of insurance is despite the fact that 50% of households feel they need more insurance.
It's fairly easy to understand why we're both concerned about our lack of insurance and yet still doing nothing about it — it sucks to think about life insurance.
While we may know intellectually that death is a 100% certainty for every single one of us, it's awfully difficult to wrap our minds around. (I even had a little trouble writing that sentence.) We prefer to think of ourselves as pretty darn invincible, even once we've gotten past the youthful, taking-ridiculous-risks age range.
In addition to the very human inability to think about our own mortality, we're also victim to incorrect heuristics. A heuristic is a rule of thumb that will allow us to make a quick decision without having to do a cost-benefit analysis over every "paper or plastic?" question. However, because heuristics are rough estimates, they can often be wrong. According to business reporter Efren Cruz,
Overconfidence is one of the heuristics. With overconfidence, a person overestimates his ability to perform a certain action. For example, he believes that he can easily earn the amount of coverage that insurance policies offer by simply investing his money…he claims that he has all the time in the world to do so and that there is a low probability that he will be hit by calamities, accidents or diseases that may lead to death.
It may seem as though you'll get a better return by saving your money and investing it wisely, but the entire point of life insurance is to protect your loved ones in the event of unanticipated death. After all, you can't qualify for life insurance if you've been diagnosed with a terminal disease. And even if you do live to a ripe old age, you might be completely wrong about your ability to invest your money well.
Another major component to our distaste for life insurance is a behavioral quirk known as loss aversion. Basically, we are programmed to strongly prefer avoiding losses over acquiring gains — and some studies suggest that losses are twice as psychologically powerful as gains.
When it comes to life insurance, since the person paying the premiums (incurring a loss) will never see the benefits, it can be a pretty difficult decision to make, especially when money is already tight. However good it may feel to know that your family will receive a $1 million payout in the event of your death, ensuring that they will be financially secure, the pain of paying your premiums will feel much more powerful (and painful) to you.
This fits in with further information brought to light by the LIMRA study: "More than 40% of Americans say a major reason they have not bought more life insurance is because they have other financial priorities right now, such as paying off debt or saving for retirement."
Basically, it can be very hard to shunt limited and hard-earned money toward something that you will never personally benefit from.
The Insurance Industry Is Its Own Worst Enemy
Clearly, the decision to buy life insurance is something that most people need to be nudged into. Often times, the nudge will be a natural life event — we'll experience a death in the family or of a friend, or we'll have a baby or start taking on the care of an aging parent, and it suddenly becomes clear just how much is riding on our shoulders.
However, insurance agents are also ready and willing to provide that nudge themselves — hence the Ned Ryersons and ridiculous advertisements of the life insurance world.
The fact of the matter is that most life insurance is sold on a commission basis. That's why the Neds of the insurance world seem to be so obliviously pushy. Their income depends on it.
The commission aspect of life insurance sales, as well as improprieties on the part of some agents, is part of the reason why a 2011 Deloitte survey found that one in four respondents "don't trust life insurance companies or life insurance agents."
The problem goes further than this, however. The life insurance industry is well aware of their unsavory reputation and is working to improve it. But those improvements seem to be focused on ways to make life insurance buyers trust agents more, rather than making the agents more trustworthy.
For instance, LIMRA has used the insights of behavioral economics to pinpoint exactly when and why buyers will commit to a life insurance policy. Using this information, they have concluded that "producers [life insurance agents] who recommend specific amounts of insurance to clients can sell more than 60% more coverage than those who don't."
But as Ed Hinerman, blogger and insurance agent puts it, "this…is about the psychology of…getting you to buy more life insurance than you had planned on or intended to. This isn't about you buying, but rather about how to sell you."
LIMRA has also put together a new selling technique using behavioral economics, called Trustworthy Selling (an Orwellian title if ever I've heard one), which according to their promotional literature, will increase likelihood to buy by 29%. But if you watch the demo video provided on the Trustworthy Selling website, the industry is clearly not changing their tactics, merely using different language so as to engender a feeling of trust in their clients. While projecting an aura of trustworthiness may be a long way from the hard sell, it doesn't change the fact that it is still a sales pitch that is attempting to get buyers to spend more than they want.
I don't know about you, but that doesn't make me any more inclined to call my friendly neighborhood insurance agent than seeing an advertisement showing a girl crying over her father's grave.
Dealing Rationally With an Emotional Issue
So where does this leave the average person? Not only do you have to get over your own natural disinclination to spend money on life insurance, but you also have deal with the sense that you cannot trust the smiling life insurance agent who has just the product for you.
The only method for dealing with this issue is to do your own homework — before you set foot in Ned Ryerson's office. Start with a life insurance calculator. MSN Money and Bankrate both offer such calculators, with the added benefit of being unaffiliated with any particular agency.
From there, it's a good idea to do some shopping around. You can do this on an insurance comparison website (although that will suddenly put you on the radar of every local agency in your area, meaning you'll be fielding some phone calls and email), or you can go to an independent agent (one who can provide you quotes from multiple companies, rather than just one) to do your price comparisons.
Basically, you should know what you want to buy prior to your first meeting with an agent — and always take some time to think about and research anything your agent suggests in addition.
Unfortunately, this is the type of advice that is nearly impossible to take. Thinking about life insurance sucks. And even if you feel strongly that you need to get this taken care of, buying life insurance still falls within the "important but not urgent" quadrant of Stephen Covey's time management matrix. Right there with flossing and cleaning out the garage, doing homework on life insurance will always feels like the sort of thing you can take care of another day.
So, to combat our very human sluggishness, it would make sense to call your local Ned Ryerson and make an appointment for two weeks in the future. That will give you a deadline to do your homework before you find yourself nodding along to his Trustworthy Selling technique.