#206 | A Practitioner’s Guide to Picking Product
Since the inception of our industry, we have been bedeviled by the question of whether or not life insurance is a commodity. It is a question core to what we do and why we exist. If life insurance is a commodity, then the role of the insurance agent is to shop the market to find the cheapest coverage possible, regardless of the other features in the product. They’re turned into price-shopping human robots, at least when it comes to product selection. Insurers are relegated to nameless, faceless vendors churning out ever-cheaper policies in the hopes of capturing more market share until they are dislodged by an even more aggressive competitor. It’s a vicious world with few, if any, beneficiaries.
And yet, it’s the world it seems that we choose for ourselves. The life insurance industry constantly seems to be trying to commoditize itself. Cheap term insurance products sell better than expensive ones regardless of the fact that the most valuable feature of term insurance is the conversion privilege, which is different for each product. The same goes for cheap Guaranteed UL, despite the fact that each product has different cash value profiles, rider options, premium flexibility, liquidity options and credit quality of the insurer. We commoditize Indexed UL based off of illustrated performance – the better a product illustrates, the better it sells, regardless of the risky, complex, opaque or downright unsustainable product mechanics and assumptions used to generate the illustrated performance. We even commoditize Whole Life by comparing illustrations from one company against another one, a practice that I’ve written about before as being completely misguided.
As a result, insurers have obliged our desire for commoditization by reducing quality. It’s not so different than what happens with Chinese factories churning out shampoos, socks and lightbulbs. As chronicled in Paul Midler’s fantastic book Poorly Made in China, US companies shifting production of commodity products to China have learned a hard lesson about what Midler terms “quality fade.” Chinese factories know that the only way they can win business is on price, so they promise whatever it takes to get the contract. Once the US company has shifted production to the factory, the quality of the product inevitably starts to fade as the Chinese owners cut corners in order to make back the margin they sacrificed to get the deal and, hopefully, the US company won’t notice. That’s how Mattel had its toys coated in lead paint (it dries faster), shampoo bottles come back smelling like almond (it’s the cheapest scent) and 100% cotton shirts riddled with polyester (cotton is pricey). It’s confirmation of the old adage that “you get what you pay for.”
That’s certainly true of manufacturing in China and it’s equally true for our products. If you want cheap term insurance, don’t bank of having much of a conversion privilege or future products available for conversion. If you want cheap Guaranteed UL, get ready for zero cash value, little flexibility on premiums and the possibility that the company selling you the product carves off the block, as Hartford, LBL, MetLife, Voya have done. If you want aggressively illustrated Indexed UL, you’re going to get a much riskier product built on tenuous performance assumptions.
The fact is that there is no such thing as a commodity – not in manufacturing or in life insurance products. Quality is always a differentiator, whether we like it or not. So why don’t we sell life insurance that way?
The answer, I think, is because selling life insurance based on quality is hard. It’s way harder than selling based on price. You have to know products well enough to determine what you define as quality and then you have to sell your client on the idea that he’d rather have quality over price. It’s a tall order, but it’s also the key to our survival. Selling based on price won’t survive the price transparency that is eventually and inevitably coming for our industry. One day, maybe not even in the too distant future, people will be able to run illustrations online and see market pricing across the board. There would be no need for a human price shopper that we currently call an insurance agent. But the one thing that clients will never have about our products is an understanding of what defines quality. They’ll see price, but they won’t see quality. Some consumers will be fine to make a decision based on half of the equation, but a lot of them won’t, and that’s when they’ll call an agent.
That means you have to be prepared. How do you get prepared? Start selecting and selling product based on quality, not price. You might show the entire market to a client, but you’re also telling the client why you’re not recommending some of the cheapest or best illustrating products on the market. You’re eliminating products that you don’t think have acceptable levels of quality regardless of their price. The final result is something that, in my experience, very few producers have – a (probably small) list of products that they will sell. Artificially limiting your choices might seem like a restriction, but it’s not, it’s actually a freedom. If you are trying to constantly keep track of every new product on the market and how all of them work, there’s no way for you to be able to take the time to fully understand any of them. That’s why producers tend to fall back on the easily observable metrics like price and illustrated performance to make a decision. Quality gets pushed to the wayside because determining quality takes time and hard work. But the prize, I think, is worth it. A small list of products means that you can really, fully, completely understand what you’re selling, simply and effectively communicate the value proposition to your clients and, maybe most importantly, ignore the distractions of constantly benchmarking and keeping up with new products.
Sometimes the best product is the cheapest product but, in my experience, that’s a pretty rare occurrence and limited almost exclusively to pockets of the term insurance market and Guaranteed UL. For the remainder of cases, the best product is the highest quality product that fits the needs of the client. It’s the product that can be tailored best to what the client wants. And in the same way that an expert tailor only uses quality cloth, a high-end insurance agent should only rely on quality products – price be damned.
Finally, you’ve probably noticed by now that I’ve referenced “quality” many times without providing a definition for what a quality product is. That was intentional. Part of being a true advisor is determining your definition of quality. I know mine – simplicity, transparency, sustainability and conservatism – but I also recognize that other people will have different definitions of quality in the same way that some investment advisors lean towards passive funds, others go for active funds, some choose alternatives and others have all sorts of variations on that. There’s no final arbiter of what truly works in investment management and there’s no final arbiter on what makes a quality life insurance product. Build your own definition by asking yourself what really matters to your clients and then go from there.