The study of economics assumes at its core that consumers will always make the most rational choices with their finances, with the goal of maximizing their personal gain. In the aggregate, this may hold true, but this idea tends to break down on a smaller scale. Consumers don’t always know the best choice for their financial situation, or even how to find the information to make that decision. Even financial professionals may act on inaccurate data or be led astray in some other way. The study of behavioral economics was created, as Craig Lambert in the Harvard Magazine wrote, to reconcile the theory of the rational actor with the reality of human psychology.
The ways behavioral economics principles can affect the sale of life insurance are numerous, and the subject of a recent study by Life Insurance and Market Research Association. Among the study’s many findings are surprising conclusions surrounding how consumers make important decisions for their financial future, and how a well-informed financial professional may be able to guide them in the right direction.
“Most overestimate the actual cost of life insurance by a large margin.”
Life insurance sales lagging
According to the Insurance Information Institute, 57 percent of all Americans own a life insurance policy, a rate that is at its lowest in 50 years. Fifty-four percent of Americans say they are unlikely to purchase a plan in the next year. A majority of consumers who already participate in a plan are hesitant to purchase more life insurance because they believe it’s too expensive. Yet 80 percent overestimate the cost of life insurance, to the tune of 119 percent more than reality among members of Generation X.
Clearly, the life insurance industry has the cards stacked against it, and a great deal of this is due to preconceived notions about their products. LIMRA’s Jennifer Douglas noted that while many in the industry recognize these obstacles, little research has been devoted to actually understanding the causes behind these trends and how they might be reversed.
“Perhaps it’s something consumers aren’t telling us?” Douglas wrote in the study. “Given the role of the subconscious in decision-making, we cannot always accurately describe why we make the decisions that we do. As humans, we’re often unaware of what’s really motivating us.”
Uncovering hidden biases
Douglas, along with others at LIMRA, set out to explain what those hidden forces were. To do this, they organized experiments to study subjects’ responses to various insurance-related questions and prompts. They also measured the reaction times of subjects when asked questions about purchasing life insurance. From this research, LIMRA designed eight specific messages aimed at starting a sales conversation and tested their effectiveness.
In the end, researchers found the most effective method of convincing consumers that life insurance was a wise investment was presenting it as a cultural norm. When subjects were told that most people “like them” owned life insurance, especially if they had children, they were much more likely to respond positively to questions about purchasing life insurance. This message was even effective with demographics that were relatively unconvinced by other arguments. Surprisingly, when asked to evaluate the persuasive statements themselves, most subjects assumed this would be the least effective.
Understanding the implications of this research is key for financial professionals who want to maximize the effectiveness of their client communications. It’s not that consumers aren’t smart – quite the opposite. Instead, advisors must recognize that every financial decision needs to be put in the proper perspective, allowing clients to see the best path for their plans and goals.
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