Driving Down Prices - life insurance - Brief Article

Kiplinger's Personal Finance Magazine, May, 2001 by Melynda Dovel Wilcox

SPENDING How LIFE-INSURANCE BARGAINS on the Web may have an impact on off-line products and influence inflation.

IT'S EASY TO point to examples of items that are cheaper on the Web than they are at the mall. But two researchers have found evidence that for at least one major consumer purchase--term life insurance--online price competition is pushing down offline prices as well. That's an important distinction, because it suggests that the Internet may in fact be contributing to a lower rate of inflation.

Economists Jeffrey Brown of Harvard University and Austan Goolsbee of the University of Chicago matched data on household Internet usage with data on the cost of term life insurance policies from 1992 to 1997. They found that premiums fell sharply toward the latter half of that period, at about the same time a number of price-comparison Web sites came online. What's more, the faster a group of households adopted the Internet, the faster the price of term life insurance fell for that group. Premiums for whole-life insurance policies, which aren't priced on the Web, showed no effect.

All told, Brown and Goolsbee estimate that by 1997 consumers were saving $115 million to $215 million a year on premiums that were 8% to 15% lower. While some of the savings may have resulted from consumers shopping around, "it's also pretty clear that individual companies have been lowering prices," says Brown. "Far and away, consumers are the big winners."

In the case of life insurance, quote sites are only a reference source. Potential customers are referred to an agent, and the actual transaction occurs off-line. But with access to the sites, consumers can get several quotes in a matter of seconds rather than hours (see the box below for three leading quote sites).

Brown expects a similar decline in prices for home and auto insurance and mortgages, and an increase in rates for certificates of deposit--other relatively homogeneous big-ticket financial products for which it's worthwhile to shop around.