Can big data bridge life insurance coverage gap?

If you're like me, a thought that periodically keeps you up at night is whether your financial future, and that of your dependents, is secure. And yet, many American adults overlook the value of individual life insurance, choosing instead to rely on their employer-provided group policies or, even worse, going without life insurance altogether. 

As an industry professional, I can clearly see the gravity of this oversight. Without individual coverage, group policies provide very little protection, leaving many people – or rather, those who depend on their financial support – vulnerable to hardship. There's a coverage gap that needs to be bridged. 

I believe it's possible to do this through big data, a major trend that has only hit the insurance industry in the last few years. But first, carriers need to understand how that gap came into existence in the first place. 

Why life insurance is often overlooked

The share of Americans with life insurance has been in steady decline for several decades, falling from 77% in 1989 to just 52%in 2021. The cause is under constant debate, but some believe it may in part be due to the fact that Millennials, a key demographic in today's market, are worse off financially than previous generations. Supposedly, this has forced many to cut what they see as unnecessary expenses like life insurance.

However, according to an IBM survey that asked Millennials about their reasons for not having coverage, 46% cited confusion about policy specifics and whether they need life insurance at all. Cost was only a concern for 35%. This tells me that the decline in the share of Americans with life insurance has less to do with the expense and a lot more to do with a breakdown in communications. Life insurance carriers are just not reaching people like they used to.

Personally, I'd ascribe much of the blame for this communication breakdown to the decline in the number of door-to-door field agents. While I'm not suggesting that they should make a comeback, carriers have largely failed to replace the vital role these agents filled. Digital systems can fill this role to some extent, but adoption in the industry has been painfully slow. While the pace of change has picked up in recent years, it's still nowhere near where it needs to be.

Given all this, it should hardly be a surprise that many people are confused and uncertain about the need for life insurance. No one is talking to them except maybe their employers. And you can bet that when an employer is offering life insurance as part of their benefits, it's more than likely that they're only offering group policies. And, unfortunately, in addition to providing meager payouts, those group policies don't follow the employees when they change jobs. 

Group coverage is not enough

Don't get me wrong. I'm not saying that group life insurance is a bad thing. It's certainly better than nothing, but I think what many people have lost sight of is that group policies were never intended to be the core of a person's coverage. 

Going back about 40 years, most people had their own individual policies, which the employer-provided group policy was intended to supplement. But as the number of people with individual coverage has declined, people have been left with nothing to rely on but their group policies offered through their employers, which are totally inadequate to their needs.

It gets worse when you consider that the coverage amounts for group policies haven't kept pace with inflation. Payouts are typically capped at $50,000, since this is the maximum tax-deductible amount. This means any coverage above $50,000 is considered a taxable benefit to the employee and must be included in their income. No matter how you spin it, there's no escaping the reality that group policies are no replacement for individual coverage. 

Bridging the gap

Fortunately, there are ways for carriers to bridge the gap through the use of big data as part of the underwriting process. Data can tell carriers a lot of things about a potential customer, such as what their annual salary is, how many dependents they have, their health status, and more. Provided that a carrier can gather and access all that data, it shouldn't be difficult to determine the level of coverage an applicant needs and to make a preliminary decision on their insurability.

In many ways, this is what those door-to-door field agents were doing back in the day: gathering intel on an applicant, determining their specific needs, and providing a policy that fits those needs. Big data infrastructure can fill that role today, providing agents and brokers with all they need to know about an applicant from the moment of initial contact. Moreover, underwriters can use this data to efficiently expedite the underwriting process.

As for where carriers can get this data, they can start by connecting with employers. Each employer should have the most basic employee data such as someone's name, address, and salary. From there, it shouldn't be hard to track down the remaining health and financial data. 

A word of advice, though: employers are likely to be a bit hesitant about handing over employee data, thinking that HIPAA regulations don't allow this, when in fact they do. To soothe any worries, you can sign a business associate agreement. This guarantees the responsible use of data without compromising privacy. 

People today don't fully understand the value of life insurance, and it's not their fault. The insurance industry needs to step up and do a much better job of making the case for individual life insurance and helping people understand that their group coverage is insufficient. Insurers need to work with employers to help consumers understand the importance of individual life insurance to provide financial security for their family members.