Editor’s note: This essay originally appeared as a LinkedIn article published April 23, 2018.

People aren’t buying it anymore. As Peter Orszag notes in a provocative piece for BloombergView:

  • From 1989 to 2016, the share of Americans with life insurance fell from 77% to 60%
  • Declines were biggest among lower income people; for example, coverage among those in the bottom 20% of the income distribution fell from 44% in 1989 to 27% by 2013 (as compared, for example, to a drop from 94% to 85% for the highest 20% of earners)
  • Recently, the overall life expectancy of Americans has stagnated – declining, even, among lower income groups – making life insurance all the more important at a time when people are running away from it

No one is really sure whyTheories abound, but one cause that deserves more attention is obvious to anyone who has bought it before: it’s a horrible experience. I bought some recently, and even though I went through a startup that touted its customer experience, it was a painful and customer unfriendly process in a way that few things are anymore. The whole thing took over three months, during which I provided them with all sorts of information (medical records, financial/credit history, lifestyle preferences, etc.), submitted to a medical exam with blood and urine samples and fielded all sorts of random questions that cropped up. Meanwhile, they and the other providers I considered offered very little in the way of trustworthy guidance/tools to support my decisions (How much coverage do I need? What product to buy? From whom should I buy it?), zero transparency into their underwriting process, no firm commitment even on how long it would take them to complete their work or even any meaningful updates along the way. To make matters worse, at no point during this process was the insurance company actually bound to the price it quoted and my only recourse should they change it would be to start over with another provider – not a trivial exercise, not the least because insurance companies share information and the very fact that I did switch would appear as a red flag to the next provider. This wasn’t out of the norm of what life insurance buyers go through, but it couldn’t be more out of step with modern consumer expectations and our “on demand” culture. What would happen to home sales, for example, if the buying experience was this one-sided?

Another anecdote: the Chief Operating Officer of a large investment firm described to me his experience buying life insurance and a situation where he couldn’t “wrap his head around” the incredibly complicated products recommended to him. He ended up choosing the most basic product available because it was the only one he could understand, but was still left with a nagging feeling that he missed something important. Needless to say, if a seasoned financial services executive can’t understand these products, how is the regular everyday consumer supposed to be able to make an informed decision?

I’m not sure they are – making the simple complicated is one of the oldest tricks in the book when it comes to selling financial services, and it seems apiece with other moves life insurers began making in the 1980s, including:

  • Increasing focus on higher margin, more complex life insurance products of questionable value to consumers. For most of the 20th century, the industry offered two basic product categories: whole life and term. Beginning in the early 1980s, firms began introducing higher margin, more complex products such as universal life and variable life and eventually variable universal life. What hasn’t changed, however, is the prevailing view among financial advisors that most people’s needs are best met by basic term insurance products. Yet despite what this conventional wisdom might suggest, industry trade group LIMRA estimates that term insurance comprises only 21% of total premiums paid in 2016 for US individual life insurance policies, which is pretty much where it has been for the last 20 years.
  • Decreasing reliance on life insurance overall as a source of earnings. By 1986, US life insurers as a group were generating more premium income from annuities than life insurance products, and at this point life insurance products represent less than 20% of industry net premium income and less than 30% of reserves, per industry trade group ACLI.

In effect, through a combination of an outmoded customer buying experience, unhelpful product complexity and providers’ competing priorities, there has been a serious erosion in the industry’s value proposition to prospective customers. To be fair, many insurance companies are starting to focus on this, investing in data science, design thinking and venture capital investing, but there isn’t yet the sort of profit pressure typically required to motivate real reform. For example, ACLI’s 2017 Life Insurers Fact Book shows a sector doing just fine making money the old-fashioned way, with profits and margins both steadily increasing over the past 10 years. Perhaps most telling is the continued – perhaps increasing – importance of intermediaries in the life insurance value chain: the portion of policyholder premiums being paid out as sales commissions actually grew to 10.7% in 2016, from 8.5% in 2006.

It is worthwhile to consider this in the context of a broader financial services industry that is undergoing dramatic change, generally to consumers’ benefit. Banking is starting to get picked apart by specialist startups (see Ant Financial’s eye popping $150B valuation as a proof point). Asset Management is getting commoditized (this BCG study indicates that, in what may be a first, 2016 industry revenue and margins actually declined during a period of strong financial market performance). Even other areas of insurance, like Property & Casualty and reinsurance, are in the midst of transformation.

Perhaps not surprisingly, much of this can be attributed to external forces, including an influx of venture capital into fintech over the past few years, and it is noteworthy that little of that activity has been directed toward life insurance, where the few recent startups that have launched tend to offer only modest improvements bolted onto the current broken business model.

Meanwhile, the need for life insurance appears to be growing, particularly among society’s most vulnerable. I am optimistic, however, that change is on its way. Life insurance is a complex, capital intensive and heavily regulated industry, but behind these traditional barriers to entry is a growing opportunity that will eventually prove irresistible to the forces that are revolutionizing other sectors of our economy. Still, it can’t come soon enough.

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