27 August 2013 0 Comments

What’s Good — And Not So Good — About The U.S. Life Insurance Industry?

good things come in small packagesThe good thing about the Life Insurance Industry in the United States is that the cost of policies has dropped over the past 20-30 years to the point where most people can afford to provide adequate protection for their families.  How many products or services can you name whose cost has followed this same downward trend?  Not many.

One of the reasons for this reduction in premiums is the fact that people are living longer, but at the same time business overhead costs have risen, so there must be more to it than that.  There is.  The policies available when I started selling in the early 1960’s lumped most people into a single category as “Standard” risks.  Smokers with a family history of cardiovascular disease might be charged the same premium as non-tobacco users with pristine medical and family records.  Today, the best risks are classified as “Preferred Plus” and would not be available to many people.  But even today’s “Preferred” and “Standard-Plus” categories will offer better premiums than the old “Standard is best” category.

The other reason for improved premiums is competition.  Fifty years ago most insurance was sold by a few companies through controlled sales forces.  All of these companies had similar overhead structures that included the hiring and training of agents and there was very little difference in cost from one company to another.  Then, in the last quarter of the 20th century many insurance companies developed policies for sale through the independent brokerage method of distribution.  By cutting out the fixed cost of maintaining a sales force these companies were able to build policies at a reduced premium level.  They competed with each other in cost and also forced the more traditional companies to sharpen their pencils.

During this same period of time, the new insurance companies entering the market through the independent distribution system emphasized term insurance pricing and its importance for most consumers.  Huge drops in the cost of term insurance resulted.

Today, by maintaining a lean overhead and careful selection of risks, the consumer has gained access to more competitively priced policies, especially when it comes to term insurance.

With all of this good news, what’s the bad news about the life insurance industry…that’s in my next entry.

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