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Q: CAN YOU BUY LIFE INSURANCE ON THE INTERNET WITHOUT THE ASSISTANCE OF A FINANCIAL PROFESSIONAL?

A: MAYBE, BUT IS THIS A GOOD THING?

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Along with advertising for automobiles and beer, there are several commercials in heavy rotation on cable TV 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 the internet is changing the way people get insurance. Consumers can shop nationwide for the best coverage, without the help of an agent to do it. At the beginning of this self-service wave, offerings were mostly for auto and homeowners insurance, however we’re seeing an ever-increasing shift to life insurance options.

The internet is definitely changing consumer habits–so can the average person really buy life insurance as simply as they buy groceries? The answer, unfortunately, is probably not. While technology can certainly change what drives customer decisions, some of the factors required to obtain insurance, particularly whole life insurance, are not affected by technological change. While complex underwriting decisions can be made more efficient with the use of technology, evaluation by a human is still required to complete some aspects of a personalized insurance policy.

The Economic Impact of the Internet—What It Affects, and What It Doesn’t

Internet technology changes the limits of 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 various brands, 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.”

You can see commoditization in play while watching the aforementioned commercials, because low prices are the driving factor in their message. In other words, “auto insurance is auto insurance,” and the “best” auto insurance policy is the one with the lower premiums.

While this isn’t true with all types of insurance, it is sold that way… however we’ll come back to that thought.

Internet technology “simplifies” purchasing 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 can negotiate your own deal without the help of an agent by communicating directly with the innkeeper. Or you can enlist the help of a web service like Kayak, Trivago, or Expedia and compare prices and rooms with ease.

Similarly, if you want a price for automobile insurance, just enter some information online, and within minutes you’ll receive quotes from several companies via email. This means brokers (such as insurance agents) are no longer serving 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. Still, it’s questionable whether that information can be processed effectively if it is not accompanied by professional assistance.

Consider the following:

1.) Term insurance is much simpler to get online

Term insurance is insurance that covers you for a term of your life. In other words, it is not permanent insurance; it is temporary insurance. Many new parents seek term insurance to cover a period of time where their family is at most risk, which can be extremely useful. However, term insurance often increases dramatically in price the older you get, which is when you’re most likely to need the coverage. There is also no cash value component.

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Because term insurance does not have these features, the underwriting process is much more simple. It’s possible to get inexpensive coverage without a medical exam, making online service quick. This can be great for families seeking immediate coverage.

However, in terms of building wealth and creating a legacy, term insurance doesn’t cut it. Whole life insurance is not only permanent (i.e. guaranteed to pay out), it has a cash value that grows and is liquid. Because of these guaranteed provisions, whole life insurance requires medical exams (free of cost) and other additional steps to verify qualification. A trusted agent can help you through this process and make sure everything is in place (and eliminating margin for error).

2.) 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. Even though 87-octane gasoline may be a commodity, 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 insurance products in the marketplace, 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.”

In fact, there are ways to “design” an insurance policy for different goals, that only an experienced agent may know how to do. It’s hard to get that kind of help and experience through an online portal.

Even a “simple” term life insurance policy can include riders or amendments, such as waiver of premium, accelerated benefits provisions, the ability to convert to whole life insurance, and future insurability agreements. When the policy in question includes a cash value component, there are even more riders and provisions to consider. There may be dividend options, loan and withdrawal provisions, surrender values, etc.

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) or discounts for certain classes, such as non-tobacco users.

Since any one item listed above can change either the cost or performance of a life insurance policy, there is much more margin for error when doing a self-service application. 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, yet each one is unique.

3.) Most people benefit from 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 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 optimize inheritance or follow an “infinite banking” strategy may want the features of a whole life policy.

An agent who understands how to properly structure an insurance policy, and understands the benefits of whole life insurance (and even term insurance), can advance your objectives by leagues. If nothing else, a financial advisor can be a great resource for asking questions that may be difficult to find answers to online.

Coverage You Can Use Your Whole Life

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. Still, the other aspects of life insurance require a personal touch. Even as the processes of providing life insurance change with technology, life insurance is not yet ready to become an “electronic grocery-store” purchase.

If we can help you design a policy that fits your financial objectives, please contact us with your questions and/or email us at welcome@partners4prosperity.com.