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Term Life as Commodity

The market is commoditizing by the year

Lots have changed in the term life insurance market and for the most part, it's been good.  Yes, we have the AIG debacle resulting from the financial collapse which was scary indeed but for the most part, the term life product has become something rather transparent and efficient...a commodity.  This is good news so let's take a look at what exactly it means to you if you're looking to purchase term life.

First, what is a commodity?  Very simply, a commodity is a raw good...something without much refinement on the back end.  We tend to think of commodities as raw inputs for other products such as oil, plastic, or even food basics like corn.  These are indeed commodities.  Turning plastic into a more complex item like you a football helmet is subject to a series of processes and even requires accreditation for safety.  The raw plastic itself as an input is a commodity.  Why would we describe term life insurance as a commodity when it's clearly a measure more complicated than the raw plastic we might make a football helmet from?  The answer lies in the a reduction of complexity when applied to an otherwise complicated product and indeed this has happened with term life insurance.  Let's see how.

There was a time when the knowledge about term life insurance resided with professionals and was virtually unknowable to the layman.  There would be reams of brochures and complicated charts, rate guides, and explanations that a trained professional would go through with you.  You change one parameter such as the choice of a rider and everything would shift.  This is definitely not a commodity.  There were also wide discrepancies between different term life plans in terms of rates, benefits, and options.  This also reflects complexity which isn't typically associated with a commodity type product.  The internet and a maturity of the term life insurance market in general have helped to reduce this opacity towards the purchaser and it's all good news.

First, the market itself became better at estimating future outcomes and pricing accordingly.  If the real risk for a given demographic (say, male, age 50, with a certain health criteria) would ideally require a monthly premium $50 for a given amount of coverage and term period, the market rates might vary considerably with some at $40 and others at $70.  This many be variations in how the company looked at risk or just a desire to maximize profit but remember, we know that the ideal pricing is $50.  Over the last two decades, the range of premiums has lessened considerably.  This means the low end slowly crept up while the high end fell considerably both with a target around the $50 ideal amount.  Further more, the $50 itself came down as the carriers felt more comfortable about their ability to successfully manage a business based on the premium amount.  The other function is that of competitiveness and this is where the internet really sped up the process.

All of a sudden, you could see all the plans side by side online in real time.  This was really new and poses a huge reason for the commoditization of the term life insurance market.  If you run a term life quote and see rates spanning from $40 to $70 for the same basic product, you'll first ask if there's anything wrong with the $40 plan.  If the carrier ratings are pretty comparable, you're probably going to go that way.  You may move up the scale to say $45 for better carrier ratings.  It will be hard to justify the $70 all other things being equal.  Guess what happens...the $70 disappears...maybe not instantly but eventually and that's the commoditization pressure as it applies to term life insurance plans and rates.  It's good news in spite of the complicated jargon and we're happy to be a part of this process. 



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