November 16, 2009
LISTEN: mp3 audio (12:14 min)
Q: CAN YOU BUY LIFE INSURANCE ON THE INTERNET WITHOUT THE ASSISTANCE OF A FINANCIAL PROFESSIONAL?
A: MAYBE, BUT IS THIS A GOOD THING?
Along with advertising for automobiles and beer, there are several commercials in heavy rotation on cable sports channels for insurance. One ad features an animated “virtual world” where consumers can meet all their insurance needs with a click of a button on their computer. Another ad shows a make-believe insurance “grocery store” with consumers choosing their products off the shelf, and paying at a check-out counter, where they are met by a perky cashier.
One of the driving ideas behind both commercials is that technology, primarily the internet, is changing the way people obtain insurance. Consumers can shop nationwide for the best coverage, and they don’t need an agent to do it. Currently, the primary offerings from this direct-to-the-consumer business model are auto and homeowners insurance, along with some term life insurance.
The internet is definitely changing consumer habits, but can the average consumer really buy life insurance as simply as they buy groceries? Probably not, because while technology can certainly change the factors that determine customer decisions, some of the factors needed to obtain insurance, particularly life insurance, are not affected by technological change.
The Economic Impact of Internet Technology – What It Affects, and What It Doesn’t.
Internet technology changes geography. Before the internet, the ability to conduct a nationwide (or worldwide) search for many products and services was impossible. As an example, most people wanting to buy a car checked with their hometown dealers or scoured the classified ads in local publications. Because shopping for rare or unique automobiles often required finding specialty brokers or people who had insider connections, most buyers were limited to what was locally available.
Today, even local automobile dealers use the internet to offer a nationwide search and delivery of vehicles to their buyers. In theory, it is now possible for every for-sale automobile to be available to every prospective buyer in America. The local and national marketplaces are one and the same.
Internet technology causes commoditization. Commoditization occurs when a product or service reaches a point where there are no features that differentiate it, and consumers buy on price alone. As a Wikipedia entry puts it, with commoditization “a product is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper.”
Watching the above-referenced insurance commercials, commoditization is definitely in play, because lower prices are prominently featured in the message. In other words “auto insurance is auto insurance,” and the “best” auto insurance policy is the one with the lower premiums.
Internet technology simplifies the purchasing process by eliminating brokers and distributors. One of the selling points of internet commerce is the “direct-to-you” aspect. Want to find the cheapest price for a hotel room? You don’t need a travel agent or broker. You can negotiate your own deal by communicating directly with the innkeeper. Similarly, if you want a price for automobile insurance, just enter some information on-line, and within minutes you’ll receive quotes from several companies via e-mail. This means brokers (such as insurance agents) are no longer needed to serve as gatekeepers and interpreters of unique or specialized information.
How does Internet Technology Affect the Purchase of Life Insurance?
The prevalence of the internet and personal computers may make it possible for a consumer to access a torrent of information about individual life insurance programs, but it’s questionable whether that information can be processed to good effect if it is not accompanied by professional assistance. Consider the following:
The geography doesn’t change. Because most life insurance transactions are regulated by state as well as federal laws, there isn’t really a significant change in geography due to technology. Insurance companies may be nationwide, but the purchase of policies is still local. Texas residents must purchase life insurance from an agent and/or company approved to write business in Texas. Although many states have reciprocity agreements and agents may be licensed in more than one state, the fact remains that the availability of some life insurance products varies from state to state. So knowing that someone in California has a unique, low-priced policy doesn’t mean you can buy it in Illinois – even if the company is licensed to operate in both states. Essentially, regulation blunts the shrinking geography effect of internet communication.
Life insurance is hard to commoditize. Whenever a product or service becomes commoditized, the usual results are price wars and slimmer profit margins. To avoid commoditization, companies constantly try to find ways to differentiate their products and services. 87-octane gasoline may be a commodity, but producers will attempt to differentiate their 87-octane fuel by adding cleaning agents, operating in prime locations (such as interstate highway exits), or offering rewards to frequent buyers. Any one of these “value-added features” creates some differentiation and may allow the supplier to charge a premium for the product.
Of all the financial products in the market place, life insurance is one of the most complex; a lot of factors figure into the makeup of a particular policy. This complexity makes it easy for insurance companies to find ways to differentiate their life insurance offerings. Thus, even when most aspects of the policy seem the same (such as the coverage amount or the length of term), it is difficult to make an apples-to-apples comparison between two policies. It’s hard to say “life insurance is life insurance.”
Even a “simple” term life insurance policy can include riders or amendments, such as waiver of premium, accelerated benefits provisions, conversion credits, and future purchase agreements. When the policy in question includes a cash value component (as with whole life or universal life), the differentiating features expand. There may be dividend options, loan and withdrawal provisions, surrender values, etc. The inclusion of investment options, which are available in variable life policies, only adds another level of differentiation.
The other non-commoditized factor in a life insurance purchase is you. Your health and other aspects of your life figure into whether you can obtain coverage. Insurance companies can adjust their underwriting criteria, thus allowing or limiting access to certain features. This selectivity may range from additional fees (i.e., “table ratings”), to coverage limits (both maximum and minimum) and discounts for non-tobacco users or good drivers.
Since any one item listed above can change either the cost or performance of a life insurance policy, there is a high degree of differentiation. Rather than being a commodity where it’s hard to tell one item from another, life insurance policies are almost like fingerprints: they all contain some common features, but each one is unique.
Most people need the assistance of a life insurance agent. Because life insurance is a complex product and because the purchase of it is typically infrequent, buying life insurance is not as easy as walking down a grocery store aisle and grabbing something off the shelf. In order for your life insurance purchase to help you reach your financial objectives, it is almost essential that competent and trustworthy brokers (i.e., life insurance agents) are part of the decision-making process.
The various components in a life insurance policy are based on rational financial principles, and separately, these concepts (shared risk, time value of money, opportunity costs, etc.) aren’t hard to grasp. The complexity of life insurance comes in the way these financial principles can be configured, both to construct a policy, and to meet your financial objectives. For example, a desire for a high level of immediate protection may prompt a prospective buyer to consider a term insurance policy. In contrast, someone wanting to maximize inheritance may want the features of a whole life policy.
Imagine what it would be like to shop once every 10 years for a power tool used only in underwater escapes from a sinking automobile. While almost everyone drives, very few people have had to escape from a sinking vehicle in the past 10 years, so this tool, while potentially lifesaving, is probably not something you think about when you wake up each morning. Unless you have a great memory (or keep good notes), you probably don’t recall the details of the last time you bought the tool. And it’s a good bet the “new and improved” models have features you’ve never seen before.
Life insurance is the same way. You don’t buy it very often, you probably don’t think much about using it, and some things have probably changed since the last time you made an application. You could make this a “do-it-yourself” project by logging on to a web site and getting a quote for term life insurance. But how likely is it that a five-minute info-surf is going to resolve a major financial decision regarding a complex financial instrument?
The internet certainly facilitates the process of understanding and purchasing life insurance. Before the Digital Age, agents carried rate cards in their briefcases, and requesting an illustration for a specific policy meant calling the home office, then waiting for a proposal to be sent by mail. Now computers and electronic communication provide instant delivery of all the details. But the other aspects of life insurance still require a personal touch. The processes of providing life insurance may change with technology, but life insurance is not ready to become an “electronic grocery-store” purchase.
A quote from Sir Isaac Newton:
“If I have seen further it is because I have been standing on the shoulders of giants.”
Filed Under: CONTROL, SEE, THINK | Leave a Comment
Ready to TAKE AIM AT AcceleratING Your Prosperity?
Learn how by grabbing our complimentary Prosperity Accelerator Pack - a short overview of an approach aimed at accelerating your prosperity – with less worry, uncertainty, and stress.
When you get your complimentary Prosperity Accelerator Pack, you'll also get a FREE subscription to our Prosperity On Purpose ezine as our thanks!
Your contact information is safe with us. Click here for our Privacy Policy.
Leave a Reply