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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