Life insurance traditionally has been viewed and treated as a societal good. The relevance of the industry was evident to all as carriers helped individuals and families of all economic strata prepare for unanticipated loss. In doing this, the industry shouldered much of the burden for alleviating the financial hardships associated with the premature death of a family breadwinner. Of course, times change: increasing prosperity, dual-income families, the prevalence of higher education and single-parentage has changed the demographic profile of the family. While much of this change created a boon for life insurance, it also led many companies to migrate to estate-protection strategies and away from pure protection coverage.
The life insurance industry has trillions of dollars in assets, but at the same time penetration of the middle market – arguably the backbone on which our industry was built – continues to decline. Of the 56 million middle-market households identified by LIMRA, more than 25 percent of them possess no life insurance coverage at all, individual or group (LIMRA: "U.S. Consumers Today: The Middle Market"), and many more remain underinsured. And while about 60 percent recognize the need for coverage and report that they are willing to buy, most often they do not or cannot follow through with their intentions.
Reasons for the protection gap
The reasons for this phenomenon are varied. On the supply side, we have an increasing focus on high net worth clients by both carriers and producers. Product portfolios often favor the more complex products to optimize tax and estate provisions. Marketing and selling these products require more agent education, licensing, certifications and other fixed costs which drive producers more into serving the high-net-worth clientele. Meanwhile, term life sales have not fallen, but they also have not kept up with the growing middle class and their needs. (Will producers drive across town 2-3 times for a $300 term premium?) Thus the protection gap has been allowed to grow.
Alongside the cost factor, the industry faces an aging producer pool, with an estimated 25 percent retiring within four years and too few younger producers replacing them. This situation is exacerbated by high turnover among new producers. Where will new business originate in the future?
On the demand side, the financial crisis limited the ability of some consumers to obtain the coverage they know they need, and employment disruption caused some to lose the only coverage they had, group life. For those with individual life only, the mean face amount is about $250,000, or 3.6 times annual household income – far below the 7-10 times that industry experts recommend, contributing to the estimated $20+ trillion coverage gap in the US. Other financial obligations (rent/mortgage payments, car loans, daily expenses) and discretionary goods and services also compete for premium dollars: Many pay $5 a day for a latte but don't spend $30/month to protect their family from unexpected death and loss of income.
The industry faces supply-demand challenges in other ways. For example, retiring agents take with them financial advising skills and knowledge of the fundamental value proposition of life insurance. These are necessary tools of the trade to sell to middle market consumers. The high-net-worth individual often is financially savvy and understands the value of life insurance and the consequences of insufficient coverage. Moreover, producers commonly are part of a financial planning team that includes the client's accountant and attorney. The middle income individual, by contrast, may be unfamiliar with insurance in general, the myriad of types of products, and what kind of – and how much – coverage they need. To successfully penetrate this market, sales reps must be able to effectively communicate the life insurance needs-benefits message.
Keep it simple
A number of carriers now are addressing the challenges that must be overcome to properly serve the middle market. They are not turning their business models 180 degrees, but they are making essential changes in order to capitalize on the growth potential of this huge market segment. Above all, they are focusing on simplicity – in products, in the sales process and, most certainly, in underwriting. But simple is not easy.
