While many Americans have an unmet need for life insurance coverage, the industry has struggled to motivate consumers to shop for this product. How can we encourage consumers to take action on this important issue?
The field of behavioral economics provides insight into this problem. While most people would like to believe they are rational decision-makers, research in behavioral economics demonstrates that many decisions are irrational and subject to a variety of cognitive shortcuts and biases.
LIMRA recently studied the impact of these biases on life insurance shopping and whether these concepts can be leveraged to improve marketing messages.
Three findings of particular interest relate to the concepts of loss aversion, present-day bias and social norms.
Avoid the Loss
Behavioral economics teaches us that humans are motivated by loss aversion, meaning that we hate losing something twice as much as we enjoy gaining something. As a result, we are hardwired to avoid a small certain loss, even if it means risking a larger potential loss. This bias works against the life insurance industry, since we are asking consumers to accept a small certain loss (paying the premium) instead of risking a large potential loss (dying prematurely while uninsured).
LIMRA investigated whether this concept could be turned around to encourage people to shop for individual life insurance. We tested a message emphasizing what consumers could lose by not shopping for coverage — the opportunity to get a good deal. We found that when framed in a positive light, this message was effective for some demographic groups but not others. In particular, uninsured consumers who were married or had children responded well to this message and viewed life insurance more positively than did those who saw a traditional marketing message.
Live in the Present
Humans also make decisions based on present-day bias, meaning we place more value on things we have right now (or will have soon) than on things we might gain in the future. Unfortunately, life insurance is perceived as something that might provide value in the future but not in the present, so consumers find it easy to put off shopping for coverage.
LIMRA tested a marketing message emphasizing the value that life insurance provides right now — namely, the peace of mind that one’s family is protected. This message successfully improved attitudes about life insurance for a number of demographic groups, including married consumers, those with young children and those with higher household incomes. It was also surprisingly effective at improving the perception that life insurance is affordable, even though the message did not mention cost but instead focused on the benefits of coverage.
Follow the Crowd
While most people like to view themselves as independent thinkers, our decisions are strongly influenced by social norms. We tend to adjust our behavior based on what everyone else is doing, allowing for more efficient decision-making. Generally speaking, the more similar the comparison group, the stronger the effect.
Unfortunately, life insurance is rarely discussed among friends, so consumers often have no idea whether others like them have coverage. In fact, only 43 percent of respondents in our study believe life insurance is “something most people have,” when in reality, LIMRA research shows that six in 10 U.S. adults have coverage.
LIMRA tested a message telling consumers that most people like them do, in fact, have life insurance coverage, tailoring the message slightly to match the demographics of the consumers reading it. This was the most broadly successful message we tested, improving attitudes about life insurance for all consumer segments in some way. In particular, this message was effective for those groups that were otherwise difficult to reach, such as single people and those without children.
A New Approach
The industry has struggled for years to encourage consumers to make rational decisions about life insurance. By leveraging the power of the irrational, it may be possible to help consumers overcome their cognitive biases and make better decisions for themselves and their families.