In purchasing term life insurance, consumers seek an appropriate policy and a reliable company. In addition, if they contemplate life insurance as a means of savings, they have to decide whether other means of investment offer a greater return on their money. The complexity of life insurance and the wide range of types of policies adds to the difficulty of this transaction for the consumer. Studies indicate that life insurance ranks among the most difficult of purchases from the viewpoint of consumers. Evidence also suggests that consumers who purchase life insurance as an Investment may not always be satisfied with the returns on their policies.
As some surveys and studies suggest, a principal difficulty for consumers in selecting among the basic types of policy is simply a lack of knowledge or understanding of life insurance quotes. Consumer groups, intermediaries and the industry also play a role in disseminating general information. After choosing the type of policy required, a consumer must then select a company. Surveys indicate, however, that consumers are uncertain as to what the cost of a life insurance policy is, and that it is difficult accurately to distinguish between high and low cost policies. In many countries, there is a lack of readily available comparative cost information. In some countries, this information “is available and is disseminated by governments, is printed in financial or consumer magazines or consumers have access to independent insurance advisers. The rate of return on savings (the Linton yield) is one method that has been used to provide comparative information on policies with savings elements, although there may also be some disadvantages in using this method. Other methods have also been proposed, including the interest adjusted cost index and the company retention index.
A third element in the consumer choice arises where a policy is purchased for savings as well as protection, as the consumer must decide between life insurance and other forms of investment. In some countries, and particularly during periods of high Inflation, surveys have shown that other forms of investment, such as equity and property oriented investments, may provide higher rates of return than investment oriented insurance. Here too, considerable differences exist as to the extent to which information is available that would enable consumers to distinguish the protection element from the savings element of a policy and thus to compare the merits of life insurance quotes and other investments. A major difficulty is that, for endowment and whole life policies, the calculation of the return on the savings element is beyond the ability of the average consumer.
Some efforts have been made to require insurance companies to disclose basic information about policy types and provide cost indices. Research into the effectiveness of one such regulation revealed, however, that consumers generally did not comprehend the information provided, and simpler disclosures, including a cost index (the surrender cost index) and a rate of return figure (the Linton Yield) have been recommended. It is a difficult task, however, to devise indices which adequately capture the complexity of term life insurance transactions yet do not confuse consumers.