1. Low cost won’t get people to do something they aren’t already doing.
Life insurance is a great example. Marketing pitches for term life insurance often highlight the low cost, and it’s true that term life insurance premiums are lower than they have ever been. Yet life insurance ownership is the lowest in 50 years. The same LIMRA data also says that 83 percent of consumers say they don’t buy life insurance because it’s too expensive—they think the average monthly premium is $33, when it’s really $12—but I wouldn’t be surprised if that answer is used by consumers to rationalize why they don’t own insurance (if you were ready and willing to spend $12, would you not spend $20 more a month to protect your family?).
In life insurance it could be that the primary reason for low utilization is that more than 40 percent of households, according to the U.S. Census, are dual income. This could mean the husband feels he no longer has to buy insurance to support the widow, since the widow will be self-supporting; the same self-supporting logic could be used when children are involved. If believing that two incomes eliminate the need for life insurance, then the cost of the insurance is irrelevant because the need is seen as irrelevant. What is needed is an agent to show why there are still gaps, even in a dual income household, that life insurance can fill. Low cost has shown it causes people to shift existing buying habits, but it is much less likely to create new buying habits.
2. Low cost lowers margins which often narrow distribution.
What if the primary reason for low insurance utilization is because consumers no longer see life insurance agents? I have two adult children with children; neither of them remembers ever being contacted by a life insurance agent. Why not? I’ve been told by agents that it doesn’t make sense to spend hours with a prospect where, even if they buy, the agent only earns a couple hundred bucks. Of course not all prospects buy, so the average income per interview is much lower. As life insurance trends switched from permanent to term and premiums declined, so did the compensation—forcing agents to move to more profitable prospects, higher margin products, and meaning the mass market was no longer served.
This happened with life insurance and, I believe, will happen in the investment world if a fiduciary-only standard becomes the law. Commission-based compensation makes it distribution-effective to meet with clients who don’t have enough assets to use fee-based services.
3. Low cost only works well with high volume (which may not be a good thing overall).
If your fixed expenses are $100 and your net revenue per sale is $5, you need to sell 20 widgets to cover your expenses. If your net is $2, even if you now sell 40 widgets, you’re not covering your fixed costs. To lower your fixed costs you can cut compensation, use more effective technology, which allows you to lay off employees and decrease overhead, cut the quality of the product, or maybe all three. On the supply side, a low-cost approach only benefits those who produce on a massive scale and harms many others. The cosmic question: Is it better for society if a person now pays $3 less on a product if it puts 10,000 other people out of work? Pursuing the lowest cost isn’t always a good thing.
