Can you DIY life insurance, either through an online portal or just “having more money”? You can, certainly. However, it’s not necessarily a good idea.
One of the major modern advances of the internet is that you can have just about anything at the click of a button. This even changes the way people buy their life insurance. Theoretically, you can shop nationwide for a policy without ever talking to another person. At the beginning of this self-service wave, offerings were mostly for auto and homeowner’s insurance. Yet now we’re seeing an ever-increasing shift to life insurance options.
The internet is 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, haven’t changed with technology. While some 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, this limited most buyers 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. Some car companies will deliver a portable car lot straight to your front door. 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. The same is also true for many markets.
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 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, many people have come to believe that this IS true… 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 the interpreters of unique or specialized information. In many situations, cutting out the middle man can be empowering and even efficient. However, for products that are not commoditized, this can be misleading and in some cases result in people buying the wrong product for their goals.
How Does Internet Technology Affect the Purchase of Life Insurance?
While the internet certainly makes it easier for you to DIY your own coverage, it’s also true that not all coverage is properly available without assistance of some sort. However, many advertisements lead people to believe that all life insurance is the same, and that the cheapest product is also the superior product. Unfortunately, this just isn’t true, and different life insurance products serve different purposes.
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. 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, the cost of term insurance often increases dramatically in price the older you get, when you’re most likely to need the coverage. There is also no cash value component.
Because term insurance does not have these features, the underwriting process is simple. It’s possible to get inexpensive coverage without a medical exam, making online service quick. This can be great for individuals or 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 and other additional steps to verify qualification. These exams are free of cost, however, they do require in-person communication. A trusted agent can help you through this process and make sure everything is in place (and eliminate the 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 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 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 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” a life insurance policy for different objectives 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.
While you may have some ability to do this yourself, an online portal can hardly help you weight the pros and cons of certain customizations as they relate to your personal economy.
You’re Also Unique
The other non-commoditized factor in a life insurance purchase is you. Your health, personal economics, and other aspects of your life figure into whether you can obtain coverage (and how much). 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 DIY life insurance application. Life insurance policies are almost like fingerprints: they all contain some common features, yet each one is unique.
3. Most people benefit from the help 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 is in the configuration of these principles, both when constructing a policy and in meeting your financial objectives. For example, a desire for a high level of immediate protection may prompt you 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. Someone who wants an additional layer of certainty in there financial life may want a specially designed whole life policy, too.
An agent who understands how to design a variety of insurance policies, and understands the benefits of different life insurance products, can advance your objectives by leagues. If nothing else, an agent 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 allow for the instant delivery of all 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.