A little while back most people had figured out they wouldn’t win the Powerball lottery jackpot and ticket sales were declining. A Powerball ticket is a low cost mental vacation where the real payback is the enjoyment of thinking about what you’d do if you won. But buyers were tired of the small vacations they were imaging from tiny $20 to $40 million jackpots. They were also tired of almost never winning even a small prize. Powerball needed a reboot.
Last fall Powerball increased the range of white balls from 59 to 69 and dropped the range of Powerballs from 35 to 26. The end result was a buyer was more likely to at least win $4 (guess the Powerball) and the odds of anyone winning the jackpot dropped from one in 175 million to one in 292 million. Because it became more difficult to win the jackpots got bigger, and as the jackpots got bigger the mental vacation fantasy rocketed, creating a bandwagon effect that led to a billion and a half dollar lottery with a billion tickets purchased. The reboot worked.
Ongoing LIMRA reports say that American families are vastly under-insured. From a rational perspective many of the families needing the insurance understand this. However, they also believe the odds of their families collecting on that insurance premium “ticket” are very low. The other aspect is the “prize” typically isn’t life changing. Even a million dollar death benefit doesn’t seem like a windfall when the person earns the equivalent in, say, a decade. Here’s how thinking like the lottery helps.
Millennials especially don’t really think they’re going to die, but if they die they mentally overweight the odds of having a headline death1. By that I mean they don’t think they’ll be killed in a regular car crash or by the flu, but that they’ll be killed by a terrorist bomb at the mall or an airplane crash or in a Sharknado tempest. The implication is a life insurance policy that costs $102 and pays off $100 million if they are killed by a volcanic eruption in Des Moines or a tsunami in Wichita, but pays $100,000 for an ordinary death, will more likely be purchased than one with a $100 premium that pays $100,000 for death by any cause.
The other concept that should increase sales is refunding premium if they don’t die. From a behavioral viewpoint, charging a $16.67 monthly premium for that $100,000 death benefit and giving the buyer a check or giftcard back for $100 at the end of the year should result in more sales than simply charging $8.33 per month. This is similar to the strategy that several auto insurers have adopted.
I’m kidding about insuring the risk that Des Moines turns into Pompeii (then again I never thought Oklahoma would have 2,200 earthquakes last year), but it strongly appears that adding a rider offering a huge payout on an extremely unlikely, but colorful, cause of death will motivate younger buyers to also get the basic insurance protection their families need. It will also increase purchases of life insurance—with and without the Sharknado rider—if the buyer is overcharged at the beginning of the premium year and then refunded the overcharge at the end.
The first two ideas are derived from the response to the Powerball tweaking and involve understanding decision making under ambiguity as well as a bit of game theory. The next one utilizes mental accounting and framing decision-making biases.
Most Americans give to at least one charity and I’m guessing that many would give more if they felt they could. Aspirational life insurance encourages the purchase of insurance by providing an “extra” death benefit that is paid to a charity (or other designated party) with the much larger “base” death benefit going to main beneficiaries. The insurance premium already reflects the cost for the extra insurance, so the aspirational insurance is perceived as part of the whole, rather than an add-on or rider that can be separated out.
For example, the insurance need might be $500,000. Based on your conversation you discovered that the consumer is a strong supporter of the XYZ Charity, gives $50 a month, and wishes he or she could do more. The aspirational insurance presentation shows that upon death the consumer’s family would receive $500,000 and the charity gets $50,000. Coincidentally, the monthly premium of $50 is the same as they are spending for the charity. The consumer’s perception is they needed the life insurance anyway and now they have it, but they have now become a major donor of their charity and it didn’t feel like it cost them anything. Indeed, since the future donation of $50,000 is already set in place they could even use the $50 spent on the charity to fund the life insurance, meaning the life insurance feels like it is free.
Of course, the consumer is aware they could make their family the beneficiary of the extra insurance and leave them $550,000, or back out the extra insurance so the premium drops to maybe $47 a month, but they probably won’t.
A life insurance purchase runs contrary to the way most people make ambiguous decisions because it forces us to accept a certain loss (the premium) and gamble on a big return—dying soon. Lotteries force the same mindset, but they overcome the resistance by offering huge prizes, and the possibility of reducing or eliminating the loss. More life insurance should be purchased if the core benefit is retained, but a bit of fantasy added, as well as providing small wins that feel like the cost is reduced. Aspirational life insurance makes the consumer feel that they are helping to change the world and protect their family at the same time. Redesigning insurance means consumers may become active buyers and disprove the old adage life insurance has to be sold.
Footnote:
1. R. Heimer, K. Myrseth & R. Schoenle. 2015. YOLO: Mortality Beliefs and Household Finance Puzzles. Federal Reserve Bank of Cleveland, working paper no. 15-21.
