Sunday, May 24, 2009

(No.29) Lottery tickets from life insurance companies

The purchase of life insurance specifically related to commercial, scheduled airline flights as well as to accidental death (AD) generally reflect the irrational nature of this form of insurance as well as public ignorance and superstition. Each of these insurance products has as much to do with financial planning as does the buying of a lottery ticket -- to which both can be likened. If a life insurance death benefit is needed it is needed if one dies and regardless of how one dies.

For many years I have deprecated both publicly (in speeches and in the Canadian Journal of Life Insurance) as well as within the life insurance companies by which I was employed  the sale of accidental death insurance whether the form of such coverage is individual or group. The sale and ownership of such coverage encourages the illusion among its buyers that genuinely useful death benefit protection has been put in place while appealing to the unfortunate perception among many, perhaps most of its buyers that they have secured comparatively cheap life insurance death benefit protection.

For such reasons as these, combined for many purchasers with the 'lottery ticket' appeal of the coverage [ 'will I die accidentally?'], accidental death coverage has been a partial exception to customary buyer resistance and to the need for agent involvement in the sales process, i.e., to the axiom that 'life insurance is sold not bought'.

Even some life insurance companies have been led to conclude (foolishly in the main) that individual life insurance policies of the more expensive, 'non-lottery' type can be sold extensively and directly and with at least as much ease as the AD coverage with which one of the big Canadian banks graciously informs me annually they have endowed me ['$1000 of free AD -- and wouldn't you like to buy some more of this wonderful accidental death coverage?' Not being in the same risk  group as a 16 year old male driving a sports car, I decline each year's invitation]. 

I have long believed that some deeper psychology is involved in the relatively greater appeal to some buyers of accidental death coverage than of the death benefit protection provided by ordinary individual life insurance policies, something beyond the lottery ticket and cost appeal of AD. The New York Times (May 6, 2008) provided an interesting answer in an article entitled "Appeasing the Gods, With Insurance".

U.S. university research has indicated that "tens of millions of people bought life insurance for scheduled flights in the U.S. [although]  not one of the [previous year's] insured passengers died in a crash. At some level they [apparently] believed that their [flight] insurance helped keep the plane aloft.... We buy insurance not just for peace of mind or to protect ourselves financially but because we share the ancient Greeks' instinct for appeasing the gods... A magical belief in insurance sounds crazy because at a rational level we realize that our decision to forego an insurance policy is not going to affect pilots or mechanics. But ... because calamities are so vivid and easily brought to mind, we tend to overestimate their probability when we intuitively judge what will happen if we tempt fate."

If this sounds far-fetched as buyer motivation, how would you prefer to explain the purchase of (flight) life insurance by rational people, coverage that never or very rarely pays anything to anyone and is of financial benefit almost always only to the life insurance company issuing the coverage?  The fact that there are many members of the public ignorant or misguided enough to waste their money buying flight insurance or accidental death insurance (or, for that matter, government-operated lottery tickets) does not lessen by one jot or tittle my longstanding disagreement with the fact that the life insurance industry not only takes advantage of such ignorance but actively promotes and sells to it. It is a fundamental ethical question for the industry and one that, in the main,  has been avoided.

If life insurance companies are genuinely sincere about meaningful disclosure that is useful to consumers, why not take action -- for example -- to require that every buyer of accidental death insurance must read and sign a form that requires that buyer to indicate that he or she understands that while everyone dies, relatively few of us die accidentally and in terms of the life insurance coverage he or she is about to purchase, a death benefit will be paid ONLY if he or she dies accidentally? And then combine that disclosure with a clear  statement of the actuarial likelihood of accidental death happening to the prospective buyer/life insured based on his or her age and gender?

How about including with this sort of needed consumer disclosure a pithy, attention-grabbing quote to assist the understanding of prospective buyers of accidental death insurance? For example, something like this from Discover  magazine: " if nothing else killed you [excluding old age and disease, then the American adult] would on average live to be 1,743 years old before a fatal accident."

I do not argue that such disclosure would eliminate the purchase of accidental death insurance but it would certainly reduce it -- and that would be a positive change. It would support the proper use of life insurance as part of one's financial planning and, when death benefit protection is needed, its actual purchase instead of a lottery ticket called accidental death insurance.

Alastair Rickard