Is Term Insurance a Commodity?
Hopefully the message that life insurance cannot be treated as a commodity is slowly getting through to advisors and consumers. I see signs here and there that it is but it seems to be a painfully slow process. See my November 20, 1012 post The Problem with Spreadsheets and Commoditization.
Even when that realization sets in, the perception of term insurance is often different. I have to admit that I don’t always view term insurance on par with permanent insurance but there are aspects to keep in mind which may not surface for years to come.
Clearly term insurance is commonly spread-sheeted and often the decision is made to go with the cheapest quote from a company one has at least heard of but sometimes not even that seems to matter. I first realized the issue years ago when I looked into converting term policies on both my Dad and Father-in-law. In both cases it turned out the policy was convertible but only to a specific product. The product was a ridiculously archaic policy with a premium at least double competitive products of the day, even with the same carrier. I believe it was a product only kept on the books for the purposes of conversion by those with no other choice.
There are a number of term products, even with some of the major players in the market, which are convertible only to certain products offered by the carrier. Some of the companies allow conversion to any product by practice today but not by contract for tomorrow. Assume that these practices will change over time. There are some contracts which allow conversion to any product in the first five years but not after that. (I’m not exactly sure why someone who is interested in converting in the first five years would buy a 20 year term anyway.) It shouldn’t be difficult to see that these can be huge issues.
Conversion periods are obviously a big issue but so are a number of particulars which wouldn’t seem apparent or important until you realize they aren’t available. Examples include splitting a policy or reducing the face amount of a contract. What about converting a portion of a policy and retaining the balance as a standalone term policy? Again, some carriers allow these transactions by practice and some allow it by contract and some don’t allow it at all.
Interestingly, the premiums of the various products don’t always line up with product features. Sometimes the cheaper spreadsheet options have the edge regarding policy details but other times the products with the most flexibility are the most expensive and end up at the bottom of the list. When you realize that a spreadsheet of multiple products may be bookended by premiums only a percent or two different, the premium paid for the power to control your destiny regarding these decisions in the future may be well worth it.
In the end, your client may or may not make decisions on policy features such as these and decide solely on price or name recognition but it may be important to bring this to their attention. If you don’t, you may get the blame and that may be incentive enough to order a quick study.
