Pricing Life (and Death)

07.09.21

“Getting your loved one out of the coroner’s office is like posting bail,” observed a grieving mother in her recent blog post, “You Can’t Die Yet, It’s Not in the Budget.” “Pull out your checkbook because they don’t just lift a body into the back of a Hearse for free. The lifting costs money and so does the turn of the key in the ignition.”

How much does it cost to die in America? A simple viewing, vault, and burial will run you $9,135. Frills such as an obituary, monument, grave marker, and flowers are additional expenses. This might explain the sudden popularity of cremation ($3k, if you choose a sensible urn off Amazon), which is predicted to account for 78% of all funerals by 2040. “It makes no sense to spend $14,000 to bury Grandma when they can’t pay for food,” explained one funeral director.

Traditionally, many of these expenses were absorbed by life insurance, a quiet pillar of financial support that blunted the sticker shock of death for well over a century. Part public health advocate, part financial guardian, life insurers became an indispensable part of the grieving ritual.

Yet, in recent years, despite stagnating or increasing mortality rates, many Americans have mysteriously opted out of life insurance. Where are sudden mourners turning to instead? The unlikely pages of GoFundMe, which proudly advertises itself as the “leader in online memorial fundraising,” hosting over 125,000 memorial fundraisers per year.

Following the nation’s greatest single-year drop in life expectancy in over forty years, we took a closer look at life insurance, from its former role as a defender of poor women and children, to its future potential as a wellness educator and insurtech partner.

Early Reputational Hurdles

The earliest American life insurance companies started out doing God’s work: caring for the neglected widows and orphans of poor Presbyterian clergymen. Despite its auspicious motives, the business model was slow to catch on for secular audiences thanks to its association with European gambling, crime, and murder. Most nineteenth century Americans had limited exposure to life insurance other than lurid reports from across the Atlantic, where the diabolical conduct of Europeans instilled little confidence in the safety of the product.

American periodicals routinely featured such headlines as, “Life Insurance — Or How to Make a Dead Man,” or “Does a Man Shorten his Life by Insuring It?” In one sensational account, a woman in Durham, England, was accused of poisoning three husbands, six children, eight stepchildren, and a lodger. “It would appear that all this horrid catalogue of murders, to which is added that of her own mother, was prompted by a desire to secure insurances and other pecuniary benefits,” reported the Insurance Monitor.

Another editor, after relaying how a physician slowly poisoned his mistress, concluded that “it is people whose lives are insured who are in most danger of poison. Their deaths have a specific money value to some one or another.”

Part of the problem was incentives. In Britain, where the courts adopted a loose standard of insurable interest, desperate policyholders gathered weekly at the Royal Exchange in London where they auctioned off their policies to speculators betting on their time of death. To assuage the frightened public, American companies and courts adopted strict interpretations of insurable interest, rendering most policies useless to any party other than the directly insured.

Insurance for the Classes

Despite its reputational struggles, life insurance was slowly adopted by the growing middle class as a respectable safety net to counter the newfound uncertainties of modern urban life. Previously, rural widows and orphans were insulated from a husband’s death by the inheritance of land: most states awarded them the lifetime use of one-third of the husband’s landed property.

Urban widows had no such security. As antebellum historian Jack Larkin documented, rural widows were naturally subsumed into the rural economy — “kinfold came into their relatives’ families as paid or unpaid domestic help, apprentices and employees, and even paying lodgers” — whereas urban widows simply became another mouth to feed for the salary-based nuclear family.

Insurance companies seized upon this new reality. Their ideal policyholder was a doting, middle-class father, preferably employed in a low hazard occupation (merchants, lawyers, dentists), who had the benevolent foresight to provide for his family even in death. Early ads painted a Dickensian nightmare, in which the thoughtless father, struck dead by a sudden fit of apoplexy or scarlet fever, left his family at the mercy of the “cold charities of the world.” Premature, uninsured death was the surest path to poverty: his unfortunate descendants would be left “to feed on husks and breathe in corners,” after descending “many grades in the scale of comfort, if not respectability.”

Controlling for Risks

Insurance companies initially targeted a miniscule segment of the population — fewer than one hundred policies existed in 1825 — because they had limited data on the mortality rates of the broader population.

Despite vigorous claims to the contrary, the actuarial data behind early premiums was based on guesswork. All four pioneering firms in the industry — Pennsylvania Company, Massachusetts Hospital Life, New York Life Insurance and Trust Company (NYLT), and Baltimore Life — relied upon mortality tables recycled from England. Unfortunately, few American towns tracked birth or death records and there was no singular church to record the entire population’s baptisms and burials. Mass immigration only further distorted the data.

Firms survived (and profited) by charging high premiums and by offering policies only to the most risk-averse of applicants. Male applicants were subjected to a physical examination performed by a doctor and were expected to be known associates of the board of directors. By 1850, the application process had become so laborious and invasive that it became a frequent target of satire. “Has the would-be insured ever bathed? If he has, when will he do it again?” asked one newspaper. “Did he ever murder his grand-mother?” asked another. “If not, what is her present age, the ‘size of her bones,’ and the number of spectacles she wears?”

William Bard, president and founder of NYLT, recognized that this strategy exposed the industry to failure by spreading mortality risks across a smaller population pool. After losing ten of his children to childbirth or young adulthood and raising five orphaned grandchildren, Bard embarked on a tireless quest to predict American mortality rates. In the 1830s, Bard sent over 5,000 letters to “Clergy, Physicians, men of science, mechanics and farmers” throughout New York to help him “form a correct estimate of the value of life in this state.”

He also lobbied state and federal legislators to include mortality questions on census forms and to liberalize property laws for married women, allowing them to take out policies on their husbands that would be exempt from creditors. By 1850, New York state had added an extensive mortality schedule to its census that included “age, sex, nativity, color, marital status, cause of death, occupation, length of illness, and month of death.” Bard used the improved statistics to slash rates across the board, capturing half of the newly broadened market, which tripled to $16 million in the span of five years.

Insurance for the Masses

Life insurance didn’t truly become a widespread financial product until after the Civil War. While the Civil War could have easily upended the fragile life insurance business, in reality Southern policyholders represented just 7% of Northern companies’ claims. The heightened threat of death caused civilian policies to skyrocket, and life insurance expanded from $159 million in 1862 to $1.3 billion in 1870.

Metropolitan Life, one of the latest insurance companies to incorporate during the Civil War craze, stunned its more conservative counterparts by offering industrial life insurance to women and children on a grand scale. For the first time, women and children were offered affordable, modest insurance policies that paid out just enough to cover funeral expenses and were funded through weekly door-to-door collection of premiums.

Predictably, a wave of “child savers” condemned the company and accused it of having “child-blood” on its hands. Numerous states considered banning the product (only Colorado succeeded), and critics filled the legislative hearings with colorful warnings. “I do not know whether you have seen the building of the Metropolitan Company in New York,” instructed one critic. “Go up to the directors’ room where the floor is soft with velvet carpets and the room is finished in rich red mahogany . . . and there you will find these gentlemen who think what a beautiful thing this child insurance is…” Peering from every block of marble in that magnificent place, he insisted, were “the hungry eyes of some starving child.”

The weak evidence, however, of mercenary parents failed to convince the legislature, and children’s insurance was given its blessing as a “grand institution for the poor.” Insurance companies became active health advocates for the youth, distributing free booklets on care for toddlers and infants, and employing nurses on house visits to new mothers. By 1928, 37.4% of all policies issued by the three largest insurance companies were for children, a trend that would continue for the next three decades.

The New Face of Wellness

Despite the many actuarial advancements made in the last century, mortality underwriting is still not an exact science. Current policies are based on a specific moment in time — the initial sale — failing to account for a customer’s subsequent lifestyle choices.

Many are hopeful that technological advances such as wearable devices could improve risk assessment, reduce premiums, and attract new customers through measurable rewards and more high-touch engagement. Rather than customers buying a policy and stashing it away until their loved one’s funeral date, life insurers could take on a more proactive, wellness-based role by providing customers with real-time feedback and advice.

John Hancock is already doing it. Last year, the company partnered with Amazon to offer its members a free Amazon Halo device — a wearable that tracks sleep, activity, body fat, tone of voice, and emotional states — in exchange for providing it with health data. “Insurance companies will suddenly have the opportunity to prevent disease before it happens rather than swoop in post-op to clean up the mess,” writes Peter Diamandis, serial space entrepreneur and author. “The upside will be cheaper insurance for healthier living, the downside is Big Brother. Do rates go up when you sneak a cigarette? Do they go down when you eat your vegetables?”

While no company has (publicly) admitted to installing health penalties, the perks are increasing for “Gold Status” policyholders: select members can earn gift cards, cut their insurance premiums by up to 15%, and save up to $600 a year on groceries (though that won’t get you very far at Whole Foods).

About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.