Life insurance is an important financial tool that allows households to manage financial risks arising from the death of an earning member. Yet, in 2019, life insurance penetration (percentage of insurance premiums to GDP) was only 2.82%. While 38.3% of Indian households reported having a life insurance product as on September 2021, life insurance covered only 1.2% of the mortality protection needs of the country. Among those who do own a life insurance policy, traditional life insurance plans such as endowment plans (bundle of insurance plus investment) are much more prevalent than term life insurance plans (pure risk protection product). We find this to also be true for low-income households. However, endowment plans are less than ideal for three key reasons. First, they offer low death cover per rupee of premium paid compared to term life insurance. Second, they provide low returns on their savings component compared to other products available in the financial market. Finally, they penalise customers substantially if the plans are surrendered before the policy completion date. All these features are significant, particularly for low-income households whose earnings are small and subject to volatility and therefore make endowment products unsuitable for low-income households.
There are several reasons for low take-up of life insurance policies in general and specifically low take-up of term life insurance. These factors range from supply side barriers such as misaligned incentive structures for agents selling life insurance policies, lack of availability and accessibility to a larger suite of life insurance products customized to the needs of low-income households to demand-side barriers such as household’s contextual factors that limit their awareness and priority for a life insurance product and their behavioural preferences pertaining to life insurance products. To narrow down the scope of this study, we aim to understand the role of effective information disclosures in steering low-income households towards buying term life insurance over endowment plans. In other words, we aim to study if accurate and complete information about various life insurance product choices can influence an individual’s purchase decision.
The study was conducted in three phases in rural Tamil Nadu. The first phase called the diagnosis stage focused on building a nuanced understanding of the problem by conducting a literature review, speaking to field experts, and conducting qualitative surveys in the study area to understand the behavioral factors influencing the take up (or lack thereof) of life insurance products. The second phase called the user testing stage incorporated the findings from the first phase into potential disclosure designs. The disclosures were created with the objective of bridging the information gap pertaining to the features of life insurance products, such as returns, surrender terms, life cover, maturity date, etc. These designs were then tested among study participants to arrive at the final set of three disclosure types. First, an inaccurate disclosure type for a standard endowment plan to create a proxy for the business-as-usual scenario. This group was labelled as ‘inaccurate disclosure type’ as the returns were forecasted based on hypothetical 4% and 8% scenarios as prescribed by the regulator (although the Bose Committee set up by the Ministry of Finance in 2015 referred to this practice as misleading). Moreover, the surrender terms were not disclosed in this group. Second, an accurate disclosure type for a standard endowment plan- this included the surrender terms and returns were disclosed as a function of amount invested along with the historical returns for the product, as recommended by the Bose Committee. Third, an accurate disclosure for two comparable options- (1) a standard endowment plan and (2) a bundled product comprising term life insurance and recurring deposit savings account. The third scenario effectively allowed households to compare and contrast the features of the two product choices. The features of the products presented to the respondents in this study were based on existing products available in the market. The standard endowment plan was mirrored based on Life Insurance Corporation’s New Endowment Plan, the term life insurance was mirrored based on the Pradhan Mantri Jeevan Jyoti Bima Yojana and the savings plan was similar to the National Savings Recurring Deposit Account offered by the Post Office. The third and final stage called the experimental design and testing involved conducting a randomized controlled trial among 300 individuals, who were randomly assigned across the three disclosure groups. Study participants were then asked about their willingness to purchase an endowment plan in a hypothetical scenario. This allowed us to evaluate the efficacy of information disclosure in influencing individual’s product choice.
Findings from our study
Willingness to purchase an endowment plan by respondents across the three disclosure groups was studied. The analysis revealed that the odds of buying an endowment plan for Group 2 respondents, i.e., those who were shown the accurate endowment plan disclosures were 31% lower compared to the odds for Group 1 respondents, i.e., those who were shown the inaccurate endowment plan disclosures (however, this result was statistically insignificant). Similarly, the odds of buying an endowment plan were 72% lower for Group 3, i.e., those who were shown accurate disclosures for two comparable options compared to the odds for Group 2 respondents, i.e., those who were shown accurate disclosures just for an endowment plan. Broadly, these results can be condensed into the following two key takeaways:
- Accurate and complete information about a product, though necessary, is not sufficient in changing customer’s purchase decision.
- In addition to truthful disclosures, presenting customers with alternate options helps them benchmark product features across various options and make better purchase decisions.
- Low-income customers have become habituated to thinking about life insurance as an investment product because they have largely been sold life insurance in the form of a standard endowment plan. Accurate disclosures that inform poor customers about realistic returns are not sufficient to change this habit. A change in habit requires offering multiple products using accurate and complete disclosures, so that customers can benchmark returns and other features and make an informed choice that is more suitable to their needs. This is also in line with the recommendations of the Bose Committee that explicitly stated that that the cost of the life cover in a bundled product should be compared with the cost of pure life cover for a similar life and tenor and should be disclosed alongside such that a customer is able to evaluate the true value of the product.
- Accurate and complete information disclosures should be mandated in the sale of any financial products as it is the first of many steps required to ensure suitable product sales for customers. Results from our study indicated that when presented with accurate disclosures, respondent’s willingness to buy an endowment plan reduced.
- Key features of the product should be disclosed explicitly as they are crucial in determining purchase decisions. In the context of life insurance, features such as policy tenure, premium amount, returns, life cover and surrender clause should be explicitly disclosed. In our study, we found returns and terms of surrender to play a decisive role in customers’ decision.
- Disclosure format matters. Key features of the product should be presented in a concise and easy to understand format. Results from our study highlighted that a table format along with a simple explainer (to describe the meaning of terms and conditions of the product) was effective in communicating the key features of the product. As recommended by the Bose Committee, at the point of sale, a one-page disclosure must be signed by the seller and the buyer. The one- pager must contain information in a manner that can be understood by the customer.
The full report is available here.