Why one size doesn’t fit all in life insurance

There is no single best life insurance product for everybody and every situation, despite what some financial planners, agents, brokers, so-called experts and media pundits may say. And to suggest that there is only one best product is silly, misleading and potentially reckless, presumably good intentions notwithstanding.  

Temporary or “term” insurance is designed to pay a death benefit if the policyholder dies during a specified term. It is a good product that can address several needs, but it is not always the best life insurance solution. There are simply too many variables that too many people, unfortunately, seem to ignore. This truth represents a tremendous opportunity for those financial services professionals looking to be more than order takers.

As the insurance industry has evolved, new products have been created to meet the demands of the marketplace. Put another way, as the world changed, the life insurance industry followed, creating new products to continue to meet the life insurance planning needs of the market.  

In the beginning of the life insurance industry, centuries ago, there was only one product, and it was called life insurance. As I understand it, this product walked, talked, smelled and looked a lot like what we refer to today as temporary or term insurance.  At that time, the word “term” as a life insurance product name did not exist, nor did products such as 5-, 10-, 15-, 20- or 30-year level term. Back then, you bought your life insurance and, if you did not die, you paid more for the same coverage the next year because you were now actually one year closer to dying and a future claim. 

Even back then, people understood that dying was inevitable and if you didn’t die now, you would die later. Basically, this was what we refer to today as yearly renewable or annually renewable term insurance. That was it for some time; pay more each year for your life insurance because you were one year closer to an eventual claim. But after a while, people noticed that their life insurance was becoming very expensive as they continued to age while getting closer to dying.

This race with death was a problem. Eventually, people who still wanted to keep their life insurance were forced to drop it because the cost became prohibitive. People didn’t like having to drop their coverage because it had become unaffordable. So they complained, the life insurance industry listened and a new product was created to solve the increasing premium problem. 

In response to market outcry, and not because the life insurance industry was bad and greedy as some have suggested, the world of life insurance designed a second product that was priced to remain level for an entire lifetime and in force for the policyholder’s “whole” life so that it would pay a claim whey they died. Basically, the insurer charged more than what was needed upfront to cover the current mortality risk and saved or “reserved” the excess premium so that they could offset cost-of-mortality increases in the future. The increasing reserve decreased the amount at risk, allowing for the premium to remain level. Permanent insurance was born, and people would no longer have only one life insurance option.

Whether people at that time realized it or not, this is the point where the opportunity to sell and buy life insurance became dynamic. Gone were the days when everyone bought the same thing every time. With only one product, it really was one size fits all. But with more than one option, those who sold life insurance now had to better understand the interested party to determine which product best suited the needs of the customer. That’s right, what now mattered most was what was most important to the client, because there was more than one option. Would the client prefer life insurance that pays if they die or insurance that pays when they die?

This still holds true today. One could argue that, given the number of products and riders today (as a result of market demand), it has never been more critical to truly know your clients and what is most important to them so that your life insurance recommendation can be uniquely designed with the right product to solve their problem. Again, the idea that only one product fits every situation is silly, misleading and potentially reckless.  

Consider the following: In the investment world there are literally tens of thousands of individual stocks, bonds, mutual funds, etc., that are available through various exchanges around the globe. Should every investment professional sell only one stock to every client who wants to hold equities? Apple, for example, has been a good stock in recent years, so should we all buy only Apple for our stock portfolio? And what about fixed income? Should everyone own only IBM corporate bonds? I hear that Growth Fund of America is a good mutual fund, so we should only buy and own that, right?  Silly, of course, and bordering on the ridiculous!

When I was young, the common man’s luxury car that everyone aspired to was the Cadillac (yes, I just dated myself). So, given my bias, everybody should buy and drive Cadillacs, of course. No matter that there are other makes and models available to serve the needs of someone looking for benefits and features not available with a Cadillac. To suggest that a Cadillac can do what a four-wheel-drive Jeep does would be misleading.

Finally, hardware stores sell more than screwdrivers to fix things, and clothing stores always carry more than one size. Even the ice cream shop owner knows to carry more than vanilla in case your taste buds prefer chocolate. In this case, suggesting, ‘You will have vanilla and like it!’ would just be wrong, and everyone knows that a screwdriver is a poor substitute for a wrench.  

I could go on, but you understand the point. Despite what some may say, embrace the fact that because of market demand driving product creation and design, many life insurance options are available today. Seize the opportunity — given the number of variables in each individual situation, your opportunity lies in the fact that different products serve different needs. Knowing what is important to your client means you can and should design and recommend something more than a one-size-fits-all term insurance solution every time. Doing anything less would be reckless.

Jeff Snyder is executive vice president of business development and insurance with Gateway Financial Advisors. He may be contacted at [email protected].