Wednesday, December 31, 2014

(No.279) " Buying life insurance in Canada: Part 1 - accidental death insurance is a lottery"

"Some informed opinions on buying life insurance in Canada:
Part 1 -- accidental death life insurance is a lottery."

by Alastair Rickard

As one who for years was both employed in the life insurance business and a public critic of it I was also dismissive of both certain journalists writing about it and of several self-appointed 'expert critics' of both insurance products and those who distributed them.

The main reason: they simply did not know that much about the business. In fact they operated (and largely still do) so far below the bar set by Joseph Belth, that longtime American leader in insurance criticism, that reaching it would for most require a rather long step ladder.

I do not aspire to write anything that might be termed a guide to buying life insurance in Canada. However I do have some opinions about insurance products. They are informed by both experience in the insurance business and knowledge of its products. They may be both interesting and useful to some of those who find worth their time.

This is the first of what will likely be a series of occasional columns.


The purchase of life insurance specifically providing death benefit protection in the event of accidental death (AD) generally reflects public ignorance and superstition as well as life insurance company culpability in both selling and shamelessly promoting not just a deceptive but essentially useless form of life insurance: i.e., a benefit payable only in the event of what is actually the highly unlikely accidental death of the insured.

Accidental death life insurance 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 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 such coverage takes the form of an individual policy or an AD rider attached to an individual policy or group insurance.

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. Indeed I have occasionally wondered if some AD buyers actually understand that AD coverage will pay off only if death results from a (non-excluded type) accident.

For such reasons as these, combined for some AD purchasers with the 'lottery ticket' appeal [ 'will I die accidentally?'], accidental death coverage has been a partial exception to traditional buyer resistance and to the need for active agent involvement in the sales process, i.e., an exception to the long standing industry axiom that most individual 'life insurance is sold not bought'.

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, say, the AD coverage with which one of the big Canadian banks graciously informed me annually they had endowed me ['$1000 of free AD for a year -- and wouldn't you like to buy some more of this wonderful accidental death coverage?']

 Not being in the same risk  group as, say. a 16 year old male driving a sports car or a hang glider in the Himalayas, I declined each year's invitation as almost completely irrelevant. 

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 aspects 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 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 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, tickets on government-operated lotteries) 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 were sincere about meaningful disclosure actually useful to consumers, they ought long since to have taken action -- for example -- requiring 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?

Such meaningful disclosure could be combined with a clear  statement of the actuarial likelihood of accidental death happening to the prospective 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 an American adult] would on average live to be 1,743 years old before a fatal accident."

Such disclosure would not eliminate the purchase of accidental death insurance but it would certainly reduce it -- and that would be a positive change. More importantly 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.

The bottom line for life insurance buyers:

  • Do not waste on accidental death life insurance financial resources at your disposal for paying premiums on real life insurance -- a core element of a financial planning pyramid.
  • Buy an 'ordinary' life insurance policy that will pay its death benefit to your beneficiary regardless of the cause of your death.
  • Accidental life insurance is, as a product, the life insurance industry's own version of a lottery ticket.




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