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Buying Life Insurance Is About To Change Dramatically

Steve Pomeranz, Life Insurance

Life Insurers Draw on Data, Not Blood

Remember the old days? When to get life insurance, you had to go through a suite of medical tests, blood draws, and other medical analysis so insurers could assess indications that lead to early deaths such as problems related to your kidneys, heart, diabetes, etc. You then had to wait a while for your results to come in so insurance companies could develop your health risk profile, estimate your lifespan, and qualify you for life insurance.

Well, you’ll be glad to know that they’ve since moved on and become pretty high-tech. Life insurers are making it easier to get policies online, often waiving medical exams and, instead, relying on existing digital records, such as your prescription-drug use, motor-vehicle insurance, driving history, etc., and algorithms that compile your risk profile, give you a quote online, and let you buy life insurance within minutes, without ever speaking to a real person.

Just a year ago, such purchases would have taken about a month and required blood samples and other medical analysis. So, things are a lot easier now, with more and more insurers moving online and trusting algorithms and using answers provided by applicants and data pulled from prescription-drug databases and motor-vehicle records and other sources to reveal more about people than simply analyses of medical tests.

For younger people, motor-vehicle records are especially important because traffic fatalities are a larger proportion of overall mortality, most strongly correlated to driving while impaired by alcohol, drugs… and, more recently, smartphone use while at the wheel. In addition, digital data sources are far cheaper than conventional medical analysis which can top $150 per applicant.  So, it’s cheaper to go online, especially for younger target audiences that are increasingly found online.

And so confident are these companies in their new methods that they are making some of the industry’s best prices available for these algorithm-driven policies. For example, if you’re a healthy male in your mid-30s, you could get a $750,000 policy for as little as $394 a year, one of the lowest rates according to price-comparison websites.

These life insurance firms are making a calculated bargain: They are willing to obtain less information from you than before and are making the process a lot easier and quicker,  so they can raise their chances of selling you a policy, rather than drawing out the process and selling nothing at all.

Life insurers are also innovating—in response to grim sales data for their industry as a whole—with sales of individual life insurance policies down more than 40% since the 1980s and about 30% of U.S. households with no life insurance at all, up from 19% in the 80s.

So, the industry is willing to take on this risk to drive a better customer experience and reverse the trend of declining life insurance ownership.

Moreover, a lot of these companies are also responding to the inexorable and rapid evolution of online offerings for just about everything, and they know if they do not innovate, they will die. (Quite akin to my recent piece on store closings by Macys and Sears as they lose out to online offerings and changing consumer behavior.)

The need to go online is a sign of the times. Decades ago, life insurance was a cornerstone of families’ finances, but the proliferation of mutual funds in the 1980s provided savings alternatives. Then sales-practice scandals in the 1990s prompted many insurers to shrink agent fleets.

To manage potential risks of going online, insurers say they have guardrails in place. For starters, these firms say they can divert an online applicant back to the conventional application process if health issues surface. In addition, the electronic-only systems are mostly limited to people 45 and younger, a subset that has relatively low mortality from cancers and heart diseases that typically kill older people. Insurers also typically cap these real-time policies at $1 million to limit their exposure.

Insurers say their algorithms take into account such things as an applicant’s age, overall drug profile, dosages, and medical information from other sources. Other resources include predictive risk modeling tools that tap into motor-vehicle records, as I said, but also bankruptcy, criminal, and other court documents, professional licenses, college attendance records, property deeds and tax filings, liens and evictions, and other digital data. For example, markers of a stable lifestyle—such as years of residence at a single address and regular credit activity—are positive indicators and reduce your insurance risk. So, in many ways, insurers now have more comprehensive customer profiles than they did a few decades ago, and this boosts their underwriting confidence.

Moreover, this algorithmic-based underwriting is subject to the same state and federal oversight as conventional underwriting. Therefore, insurers must first obtain your permission to obtain personal information.

As insurers migrate online, they are doing so by partnering with web-savvy firms that specialize in social media and know how to target and influence millennial and younger customers and are up-to-date on data encryption and online security.

While all this is relatively new, the growing use of algorithm-based underwriting is surely and rapidly transforming yet another staid line of business to the speed of the Internet and its most avid users.