The Power of Framing: A Term Insurance Example

Wednesday, September 16, 2009 15:40
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The Power of Framing: A Term Insurance Example

In behavioral economics, “framing” refers to the ability to influence a decision by describing the same situation in different ways. For example, the perceived value of medical expenditures can depend on whether the results are stated as an increase in the survival rate or a decrease in the death rate. 

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This morning I was helping a client choose between a 20-year term insurance policy and a universal life policy. After he had eliminated the universal life policy from consideration, he mentioned 30-year term as an alternative. The 20-year term policy cost $6,835 a year, and the 30-year term policy cost $11,485 a year.

 
To make a decision, I asked him to start with the 20-year term policy and then consider this offer: For a nonrefundable premium of $4,650 a year for 20 years, he could purchase the right to buy a 10-year term policy starting 20 years from now with a guaranteed premium of $11,485 a year.
 
That deal did not sound appealing to him, even though it is equivalent to buying a 30-year term policy now. I have never seen a client choose 30-year term when I have framed the choice as the option to extend a 20-year term policy.

Comments (1)

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Paul@EWM
A good example for use with clients.
Paul@EWM , September 17, 2009

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