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Do you compare and carefully select life insurance products?

Masahiko Ezawa
Professor, Faculty of Commerce, Waseda University

When asked what the most expense purchase is in their life, many people may answer, “A house.” Whether it is a house or a condominium, most working adults struggle to make housing loan payments which lasts over a considerably long period of time. What comes second? The answer could be educational expenses for children.

Today, when the total fertility rate, or the number of children who would be born per woman, is 1.5 or less, parents wish to provide their precious children with the best education they can afford so that their children can live comfortably in content in the future.

Moreover, fairly a large number of people note life insurance as the next most expensive purchase after housing. The most recent survey (The following section uses the results of the FY2015 national survey of the actual condition of life insurance conducted by the Japan Institute of Life Insurance) indicates that the average amount of life insurance premiums paid per household in 2015 was \385,000, accounting for 7.4% of the annual income. However, the amount has continued to fall, which in 2003, it was \533,000, representing 9.3%. Households that do not buy insurance claim that they cannot afford to do so economically as the foremost reason, but the amount of life insurance premiums paid is expected to grow depending on future trends in the economy and disposable income per household.

Reason for taking out life insurance

For what purposes, then, do ordinary households take out life insurance? The results of the survey show that the largest percentage of people do so to pay medical and hospitalization expenses (58.5%), followed by the intention to guarantee their family’s living expenses in case something happens to them (53.1%). Meeting medical needs comes first, with meeting needs of the surviving family coming second. This prioritization has remained unchanged for the past decade. The primary purpose of life insurance also differs by age group. Respondents aged 45 or older prioritize meeting the needs of medical expenses, whereas those aged 45 or younger put the needs of the surviving family first. Quite rationally, younger heads of household consider the security of the surviving family as more important.

Over 90% of insured households carry insurance on medical expenses and have special medical agreements, and as shown in the table below, there are not major differences in this percentage among the household income categories. Rather, even among the households with an annual income of \2-3 million, the percentage nearly reaches 90%, but it is doubtful whether the householders were well informed and convinced by their insurance firm when they took out these insurance policies. In other words, under the social security system, which supports the foundation of our lives, costly medical care expenses are paid by insurance, and the payments for medical care of those who are insured are reduced according to their income. Whether we should seek additional medical attention by paying premiums to life insurance firms should be determined depending on the amount of income.

Percentage of households that carry insurance on medical expenses and have special medical agreements (by household income)

Household income
Less than 2 million 2 million to less than 3 million 3 million to less than 4 million 4 million to less than 5 million 5 million to less than 6 million 6 million to less than 7 million 7 million to less than 10 million 10 million or more
Percentage of such households (%) 87.0 87.7 91.3 90.9 91.7 95.2 93.8 95.0
Reasons for and channels of purchase

The following analyzes the direct reasons for buying particular life insurance products.

35.6% of the people bought life insurance of their choice, and earnest explanations by the sales representative and agency personnel influenced the decision of 20.6%. 17.5% said they bought it because the sales representative and the agency personnel were their acquaintances. In terms of price, which came in fourth and is considered a major factor in most purchase decisions, 17.1% of the people gave low premium as the reason why. How the insurance product meets needs and who is selling it become important features when buying life insurance. It is worthy of note that the yardstick of “the cheaper the better” does not apply here.

How about purchase channels?

The percentage of those who bought life insurance from insurance firms representatives was the largest at 59.4%. This was followed by purchases from agencies or other sales representatives (13.7%), mail order (5.6%) and through banks (5.3%). Mail order includes selling life insurance via internet, which became popular at one time. There is ample room left for development of this business model, which provides low-priced, simple products to young married couples with children. However, two negative aspects of the model are pointed out. One is that it takes much time if buyers go through purchase procedures on smartphones because the model was originally designed for PC users. The other is that consumers who experienced the Great East Japan Earthquake profoundly recognize the advantage of face-to-face sale by sales personnel who confirm the safety of the insured and provide other services while taking measures to pay insurance money.

Product comparison

Finally, when asked whether they compared several products before signing the life insurance contract, nearly 70% of respondents said that they did not particularly do so. On the contrary, around 25% replied that they made comparisons with products from other firms. It is desirable to think of life insurance as shopping goods and buying it after examining several products while clarifying one’s needs.

People often say that there is a variety of life insurance products, which are complicated and difficult to understand. Yet, what we expect of life insurance as consumers are limited to the following functions: preparing for (1) loss of income and (2) incurrence of extraordinary expenses due to accidents in one’s life, such as premature death, illness, injury and unexpected longevity. Keeping these functions in mind will help to buy life insurance more reasonably.

Masahiko Ezawa
Professor at Waseda University Faculty of Commerce

Professor Masahiko Ezawa graduated from Waseda University with a bachelor’s degree in commerce in 1983 and left the University in 1991 after completing the doctoral program courses. In 1992, he became full-time lecturer and later, assistant professor at the Faculty of Business, Hachinohe University (now Hachinohe Gakuin University). Professor Ezawa was then appointed assistant professor at Waseda’s School of Commerce in 1999. After obtaining his doctoral degree from Waseda in 2001, he became professor in 2004 at the Faculty of Commerce. Professor Ezawa served as the President of the Japanese Society of Insurance Science from 2010 to 2014.

[Major Publications]

Information Disclosure by Life Insurance Firms, Seibundoh, 2002
Insurance Theory, Seibundoh, 2008
Insurance Science, Yuhikaku Publishing, 2016
Recent papers include “The Identity of Insurance Business by Cooperatives,” Journal of Insurance Science, No. 630 (September 2015), pp 103-120, and “Development of Insurance Sales through Banks,” JILI Journal: Special Issue in Commemoration of the 40th Anniversary of the Establishment of the Japan Institute of Life Insurance (II), September 2016, pp 51-70.