What Life Insurance Pros Can Learn from Behavioral Economics


Most people are in agreement that a long-term care policy is a sensible, valuable investment. If that’s the case, why aren’t more people purchasing one?

“Most agree they need long-term care insurance, but few actually purchase it.”

According to LIMRA’s recent findings in its 2016 Insurance Barometer Study, while 67 percent of consumers agreed that “most people need long-term care insurance,” only 16 percent reported actually owning a policy. Even 52 percent of the same sample admitted they themselves should purchase such a policy, but still hadn’t done so. This is despite a majority of Americans reporting a general concern about affordable care when they or a loved one becomes sick in old age or becomes disabled unexpectedly. According to LIMRA, over 33 percent said they were “very concerned” about the financial impact of long-term care.

There is some sort of disconnect between long-term care providers and the general public. Given LIMRA’s data, however, the two groups can’t be that far apart from one another. The solution to getting more Americans covered by long-term care insurance may lie in research from an emerging field of study: behavioral economics.

Filling in the gaps

The study of behavioral economics, as noted in a recent article in Harvard Magazine, has evolved to fill in the gaps that exist within classical economic theory. According to the last two centuries of economics, in an open market, consumers will always make the most rational choice that benefits their situation. This is not the case with many aspects of real-word finance, and especially not with regard to insurance. According to statistics from the U.S. Department of Health and Human Services, the average cost of long-term care in 2010 ran up to $6,235 per month for a semi-private room in a typical nursing home, or $21 per hour for a home aide. That’s not including charges for food, housekeeping and activities. And considering the average American lives for around another 20 years after retirement, on average, these costs quickly become unmanageable for the uninsured.shutterstock_44325913

Unfortunately, just stating these basic statistics is often not enough to convince clients that long-term care insurance is right for them. That’s why Tom Riekse, Jr., a financial professional with special expertise in long-term care insurance, had a few suggestions to explain how advisors can bring the tenants of behavioral economics into the conversation.

Primarily, as Riekse, Jr., noted, advisors need to shy away from statistics and rely on stories instead. Hard data tends to be palatable to only financial professionals, not the ordinary consumer. Instead, advisors need to appeal to the emotional logic of a life insurance policy. The numbers and reasoning behind it may not make sense at first, especially when thinking in such a long-term way. That’s not to say clients are unintelligent or unable to grasp the importance of a life insurance plan. It’s just up to the advisor or planner to bring the right dose of perspective that allows them to see both sides of the issue.

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