Combining a heterogeneous mix of products into a bundled unit often reduces cognitive load and lessens the effects of mental accounting biases while price insensitivity increases. The fast food industry does this with great success. We tend to isolate decisions and not see the bigger picture, which often leads to not buying. To counter, the restaurant will offer a combination of burger, fries and drink for a set price. The burger/fries/drink combination causes us to see this as buying a meal rather than buying a burger. Your cognitive load is lessened since you don’t need to make three decisions, but only one. The result is often not only a bigger sale, but a transaction that has done a better job of solving the consumer’s food need.
The insurance industry has done this bundling of products to some extent. They show the overall discount the consumer receives if they buy both auto and homeowners insurance from the same carrier, or an annuity may group a number of benefits under a single rider fee. However, this bundling approach can be taken further.
A situation where bundling needs to happen far more is in retirement planning. Usually the consumer is presented with a series of isolated decisions…accept this investment portfolio, select a provider for savings and bank services, do this estate plan, and buy this annuity. The result is the consumer tends to not consider the overall effect of each decision and this can result in bad choices. Example: The consumer is asked to place $100,000 in an annuity that will generate $12,000 a year when he retires. The annuity also has a $10,000 surrender charge. The consumer does not buy the annuity because he fixates on the concern that he will need this $100,000 and thus lose 10 percent of his money when he cashes in the annuity. However, if the annuity decision is placed within a retirement planning bundle, where the consumer sees that in addition to the annuity he still has $200,000 in money market accounts and $700,000 in securities, the fear he will need the annuity money diminishes and the 10 percent potential cost of surrendering the annuity becomes a one percent unlikely cost when looking at all of the assets.
Annuity bundling can be used to create an “Income Now-Freedom Later” annuity unit where one annuity produces income immediately and the other(s) could generate an income in later years or be left for heirs if the income is not needed. An example of this would be combining an immediate annuity with a deferred guaranteed lifetime withdrawal benefit annuity (although aggregation rules shouldn’t apply in this example [IRC §72(e)(11)] a tax advisor should be consulted for individual situations).
Insurance bundling is being done where dental/vision/health policies are shown as a unit, but the marketing can be improved. Every request for life insurance on children could also include a quote for a “Protected Child” unit that provides life and dental coverage. A term life quote for an adult could also include a quote for a “Life and Death” bundle that includes life and disability insurance.
Bundling is usually done by the product manufacturer, but is often easily accomplished at the retail level where it can be personalized. An appointment to talk with one spouse about a deferred annuity could also include a single premium life illustration on how the death benefit could be used to replace Social Security income at the spouse’s death. If the agent knows the prospect is a supporter of a charity, a scheduled estate planning meeting could show how the “Legacy” life insurance bundle can pay estate taxes as well as support the charity.
Bundling is often done so the mix contains assets only or expenses only, but concept bundles permit interplay. A “Today and Tomorrow” unit could combine an asset move to a deferred lifetime income annuity with annual expense items of life insurance, disability and long term care premiums (of course, additional assets could be used to buy an immediate annuity to help pay those annual expenses).
Even if the annuity and insurance solutions are not packaged together as a bundle, the agent can help increase the probability of a successful purchase by helping the consumer see the bigger picture and the place the insurance solution occupies within the whole. A bundled approach lessens cognitive load and makes the decision process less complicated.
