Product Comprehension: the Case of Permanent Vs. Term Life Insurance

Robert W. Chestnut, Columbia University
Jacob Jacoby, Purdue University
ABSTRACT - Product comprehension (i.e., a factual appreciation of permanent vs. term/invest life insurance) is related to search and choice activities. Relatively high levels are associated with a search emphasis on permanent insurance and, for males, a choice of this alternative. Results appear consistent with the implications of memory for decision making behavior.
[ to cite ]:
Robert W. Chestnut and Jacob Jacoby (1980) ,"Product Comprehension: the Case of Permanent Vs. Term Life Insurance", in NA - Advances in Consumer Research Volume 07, eds. Jerry C. Olson, Ann Abor, MI : Association for Consumer Research, Pages: 424-428.

Advances in Consumer Research Volume 7, 1980     Pages 424-428


Robert W. Chestnut, Columbia University

Jacob Jacoby, Purdue University

[Correspondence should be addressed to Robert W. Chestnut, Uris 506 Graduate School of Business, Columbia University, New York, New York 10027. Telephone: (212) 280-4361.]


Product comprehension (i.e., a factual appreciation of permanent vs. term/invest life insurance) is related to search and choice activities. Relatively high levels are associated with a search emphasis on permanent insurance and, for males, a choice of this alternative. Results appear consistent with the implications of memory for decision making behavior.


Models of consumer information processing (CIP) are taking an increasing interest in one basic activity: memory. Chestnut and Jacoby (1977) review the growth of this interest and relate several of the concepts involved. Emphasis is placed on memory's role in decision, its ability to enter into and structure our purchase behavior.

Subsequent developments continue this emphasis and range over a variety of issues. Jacoby and Olson (1977) examine the consumer's reaction to price. Calder (1978) details the impact of memory on persuasion. Olson (1978a) considers the use of memory to store plans or schemata of conscious evaluation. Most recently, Bettman (1979) advances a theoretical integration of memory into choice behavior.

Reflecting on the nature of these developments, a traditional distinction of the decision sciences is raised. Research is said to be either "normative" or "descriptive'' in orientation (Slovic, et. al., 1977a). Normative studies deal with the manner in which decisions should take place. Descriptive studies focus on the manner in which (given the human element) they actually do take place.

The current emphasis on memory is descriptive. It has little interest in setting standards or norms for the contents of memory. Instead, it lets the organism define the contents and their processing. Although this increases the sophistication by which we model the consumer, it neglects an important aspect of memory in the overall context of decision.

Memory has implications beyond an "internal" analysis of choice behavior. It is the system component which must learn to understand and deal with reality. External standards relevant to the adequacy of its knowledge exist and may or may not be acquired in the learning process. From a normative perspective, we must begin to focus on memory and the aspect of product comprehension.

Consider nutrition information. A consumer buys a product because of its nutritional value. Many report this in national surveys of consumer behavior. Yet, the data (Jacoby, Chestnut, and Silberman, 1977) indicate a low probability of acquiring precise levels of nutrients and a still lower probability of understanding the levels once acquired.

The consumer may indeed operate on what he or she feels to be nutrition. Memories may enter into and direct the system to consider a specific "fortified" brand. Descriptively, an analysis of this internal information and its processing is important. Normatively, it is clear that this information exists in the absence of specific knowledge. The consumer has little stored information on what fortified means or on what practical implications it might have for diet. Product comprehension, in a real sense, is lacking.

The present investigation examines choice behavior in the context of factual understanding and information storage. It selects a product category in which the consumer has some say in, but little grasp of, the buying situation. Specifically, data are collected on the case of permanent vs. term life insurance.


Life insurance is an incredibly complex and important product. "...if the four most complex areas of consumer education were to be selected, life insurance would undoubtedly rank there just as it did in the list of four basic necessities" (Richardson, 1973, 62). Consumers are at once overloaded and outclassed. It is no accident that agents often spend more time explaining their product than closing their sale.

"The market for life insurance has always been one where the consumer is acknowledged to be inadequately informed" (Dorfman, 1976, 47). Although surveys show 40% to 50% consider themselves "informed" (LIAMA, 1973), this may be little more than a surface opinion. Beutel and Nuckols (1978, 28) observe a marked tendency for insurance consumers "to think of themselves as sophisticated shoppers even if their actual behavior is somewhat less than sophisticated."

Problems with product comprehension are most apparent in young, single adults. Empirical data on the college population, an important segment of the life insurance market, supports this. A survey by Koonce (1976) finds students unable to define key terms and concepts. Rubin examines problems in the processing of policy information (i.e., in cost comparison). One indication of low comprehension is quite dramatic and warrants further attention.

"Consumers' confusion about insurance was emphasized when the survey group was asked about the relative advantages of buying cash value life insurance (i.e., permanent insurance) or buying term insurance and investing the difference. Almost 60% had no opinion on the subject. While this is a highly debatable issue, this writer feels that the high "no opinion" response was due to many respondents not knowing what the question meant (Rubin, 1977, 67)."

Strictly speaking, permanent and term insurance are two different products (cf. NAIC, 1976). They fit different needs and situations. Permanent includes a protection (i.e., death benefit) and a savings (i.e., cash value) component. Term offers only protection. Some contend, however, that term insurance can be purchased in a strategy comparable to the permanent product (cf. Life Insurance, 1974). A strategy of "buying term and investing the difference" allows the consumer to add on and, thus, assume personal responsibility for a savings component. Although the success of this strategy meets with various interpretations, it does seem that consumers are increasingly exposed to the term alternative (e.g., Wall Street Journal, 1979).

Do they understand this alternative and its comparison to permanent insurance? By themselves, the answer is no. Fortunately, decisions of this type are rarely a matter of personal expertise (the lack of which is evident in Rubin's survey). Product comprehension in life insurance is mediated by external authorities and their descriptions of the buying situation. The consumer's task is to relate existing knowledge (i.e., factual information, fragmentary as it may be) to such descriptions.

Theory (cf. Chestnut and Jacoby, 1977; Olson, 1978b) suggests that, beyond just storing factual structures, memory serves a role in perception and the creation of conscious evaluations. That is, consumers are aided in the task of understanding life insurance descriptions by having had previous contact with the product. Their past experience lends meaning and structure to the comprehension which is active at time of purchase. Sproles, Geistfeld, and Badenhop (1978) refer to this phenomenon as the influence of "consumer sophistication" and advance tentative findings on quality judgments and preferences for durables.

To investigate this sophistication or process of comprehension in the context of insurance purchasing, a sample of students are exposed to a description of two insurance strategies. The description is factual and unbiased in orientation. Upon completing this description, product comprehension is assessed via a subjective response and an objective quiz. Students then enter a simulated purchase environment (cf. Jacoby, et. al. 1976; Jacoby and Chestnut, 1977) and arrive at a choice of strategy. Analysis focuses on the implications of low vs. high product comprehension.


Five hypotheses are suggested. Given the size and nature of the sample employed in this study, tests for these hypotheses are tentative, requiring further research for external validation. The first hypothesis draws a relationship between memory and comprehension. The remaining hypotheses build on the implications of this relationship.

H1:  Product comprehension will be positively related to a prior, subjective estimate of product knowledge.

Since life insurance is a traditionally male-oriented product, knowledge/comprehension might be expected to vary with sex of subject. Males might not only contact the product more frequently, but do so with the intention of using the knowledge imparted at some future date.

H2:  Product comprehension will be higher in males than females.

Knowledge and, hence, comprehension will have a source. In life insurance, it is the agent. "...80% of the respondents asked agents for the information they wanted." (Beutel and Nuckols, 1978, 28).

H3:  Product comprehension will be positively related to experience with agents.

Agents should impart more than factual knowledge about the product. Their job is to advise on purchase, to develop preferences (i.e., heuristics) in purchase. The industry's position is on the side of permanent insurance. If the industry serves as the primary source of product knowledge, then high comprehension should be associated with a preference for and greater consideration of this alternative.

H4:  Product comprehension will be positively related to search behavior directed at the permanent alternative.

This focusing of pre-purchase consideration should also be reflected in a greater incidence of choice.

H5:  Product comprehension will be positively related to choice behavior directed at the permanent alternative.



96 college undergraduates (55 males; 41 females) participated in the study. These were a convenience sample of freshman and sophomores, all drawn from a subject pool of introductory psychology classes. The majority (85.4%) were between 19 and 21 years of age. Only 5 were married.


Product comprehension was first considered for the entire sample. This served to focus attention on 42 subjects, 23 classified high and 19 classified low in product comprehension. Hypotheses were then tested on this reduced sample.

Independent Variable

Product Comprehension.  Subjects read (self-paced) a 1,400 word, buyer's guide description of the two strategies. [The authors wish to acknowledge the assistance of Fran Jacoby, CLU, and members of the FTC's task force on insurance in the preparation of this material.] The description did not take sides on the choice, but instead defined relevant terms and concepts.

Upon completion, the description was rated on overall understanding (five-point scale: "not at all"; "only slightly"; "moderately well"; "very well"; and "extremely well"). Subjects were also tested on a multiple-choice quiz. Four items (presented in the description, viz., "face value"; "premium"; the concept of "cash value"; and the concept of "investing the difference") were used to compute an objective criterion of understanding.

Response on these separate measures was systematically combined to classify high vs. low levels of comprehension. Subjects were first divided on a median-split of their reported (i.e., self-perceived) understanding. Their comprehension was then further defined by, objective performance. Only those scoring in the appropriate upper or lower one-third of the sample were retained. Since the items tested were necessary to an understanding of the strategies, this was considered a logical combination of response. It eliminated those at a moderate level of objective performance and those with contradictory subjective/objective criterion.

Dependent Variables

Buyer Characteristics.  Measures were obtained on a variety of characteristics. These included: sex of subject, a subjective assessment of product knowledge, previous agent contact, ownership of policy, previous consideration of purchase, and previous search for product information.

Search Behavior.  Subjects engaged in a purchase simulation. This involved a process of selective information acquisition. A 4 x 36 matrix of policy-related information values was used (Chestnut, 1977). This included a submatrix of company information (4 companies by 12 information properties), a submatrix of permanent information (4 policies by 12 information properties), and a submatrix of term information (4 policies by 12 information properties). The information was real and pertained to either a $10,000 permanent or $10,000, 10-yr. term policy.

In addition to the basic search statistics (number of values, number of properties, and decision time, cf. Jacoby, et. al. 1976), a ratio was computed to examine the relative dominance of permanent vs. term acquisition. The number of permanent values acquired was divided by the total of permanent plus term values acquired. An arcsine transformation was then used to adjust scaling. A ratio for properties was also computed.

Choice Behavior.  Subjects decided on a permanent or term/invest strategy. This was determined by their selection of a specific policy. In addition to a purchase choice, they rated their certainty in selecting the one best policy, the validity of their choice and their confusion in purchase.


Subjects were tested individually. They began by completing a questionnaire on buyer characteristics. This was collected and a description of the permanent vs. term/invest strategy provided. Upon completing the description, subjects answered questions on product comprehension.

The purchase task was then described (see Chestnut, 1977, for a full account). Briefly, subjects were asked to assume an interest in buying permanent vs. term/invest insurance. Information on four companies and their policies (each company offering a permanent and a term alternative)was made available. Subjects were free to acquire individual values of information via verbal request. The process of their acquisition (value-by-value) was monitored and their eventual decision recorded. A post-purchase questionnaire was administered and subjects debriefed.


On the basis of subjective ratings, product comprehension appears high. Although 97.9% find the description to have "new" information, nearly all subjects (99%) report a moderate to extreme understanding of the material. The breakdown is as follows: "not at all," 0%; "only slightly," 1%; "moderately well," 40.6%; "very well," 54.2%; "extremely well," 4.2%.

The objective scores are not as convincing. A chance performance guarantees approximately two items. 34.4% of the sample perform at or below this level. 30.2% have three items correct and 35.4% receive a perfect score. Combining the two measures in the specified manner identifies 23 (very, extreme/4 items) high comprehension subjects and 19 (slight, moderate/i-2 items) low.

H1 is supported in a comparison of these two groups. Product comprehension is significantly related to a prior, subjective estimate of product knowledge (X2 = 7.45; df = 1; p < .01). High comprehension subjects rate themselves "average or above" (78.3%) rather than "below average" (21.7%) in product knowledge. Low comprehension subjects rate themselves "below average" (68.4%) rather than "average or above" (31.6%).

H2 is supported. Sex of subject is significantly related to product comprehension (X2 = 4.34; df = 1; p < .05). Males are more frequently classified high (69.2%) than low (30.8%) in product comprehension. The reverse is true for females, high (31.3%) vs. low (68.8%). The expected basis in product knowledge, however, does not appear. Although males tend to report greater expertise, the relationship is non-significant (X2 = 1.65; df = 1; p = .20). This lack of relationship (i.e., between sex of subject and experience-related variable) holds true for ownership of policy, prior purchase consideration, prior information search, and prior agent contact.

H3 is supported. Table 1 lists the Chi-square values and significance levels for tests between product comprehension and buyer characteristics. Of the potential sources of factual knowledge, only prior agent contact exerts an influence. The modal value for high comprehension subjects (43.5%) is 2 or more contacts (17.4% with 1 contact; 39.1% without contact). Contrast this to 78.9% of the low comprehension subjects reporting no contact (15.8% with 2 or more contacts; 5.3% with 1 contact).



[It should be noted that the sample reported moderate levels on these characteristics: 49% ownership; 36.8% consideration; 18.8% search; 37.5% agent contact.]

H4 is supported. Table 2 lists t values and significance levels for tests relating product comprehension to search behavior. The broad outlines of search are the same. High and low comprehension subjects acquire an average of 25 values (17.4% of matrix) along 10 different information properties. They take roughly 18 minutes (488 seconds) in decision.



With regard to the relative emphasis of search, however, differences do emerge in the expected direction. High comprehension subjects allocate 30% more values and 33% more properties to the permanent alternative (ratios equal to .80 and .83 respectively). Low comprehension subjects show a slight preference for the term alternative (5% emphasis, ratios equal to .45).

Since comprehension is correlated with sex of subject, both variables are considered together. A multiple classification analysis shows a joint influence of 17% of the variance associated with the values ratio (r = .42) and 20% of that with the properties ratio (r = .45). Beta weights for comprehension point to a strong, independent effect (.45 and .48). Sex of subject exerts a minor effect only after control for comprehension (.16 and .15).

Finally, H5 receives mixed support. Choice behavior is in the expected direction (high comprehension, 69.6% permanent/30.4% term; low comprehension, 47.4% permanent/52.6% term) but not significantly so (X2 = 1.31; df = 1; p = .25). The picture changes dramatically, if we introduce sex of subject.

A Fisher's exact test is used to compute significance levels for males and then females. The analysis for males is significant (p = .01). High comprehension males buy permanent (66.7%) rather than term (33.3%). This reverses for low comprehension males, who buy term (87.5%) rather than permanent (12.5%). The analysis for females is non-significant (p = .63). If anything, both low and high comprehension females tend to buy permanent insurance.

After choice, high vs. low comprehension subjects do not differ in the certainty attributed to having selected the one "best" policy. The average certainty rating is a scale value of "a good possibility, 6 in 10 chance." No differences are apparent in the degree to which high vs. low comprehension subjects considered their behavior to have been valid or "real-world" in nature. A majority of these subjects (66.7%) indicate a high degree of realism.

Differences do emerge in perceived confusion. Product comprehension is significantly related to a post-task evaluation of confusion in purchase (X2 = 4.44; df = 1; p < .05). High comprehension subjects report: 87% little to no confusion; 13% moderate to heavy confusion. Low comprehension subjects report: 52.6% little to no confusion; 47.4% moderate to heavy confusion.


Life insurance is a product characterized by low levels of comprehension. Consumers store little in the way of factual information or understanding. Yet, they do engage in decisions. They listen to and interpret product descriptions from a wide variety of sources (friends, relatives, agents, regulatory agencies, consumer advocates, etc.). Somehow, they manage to cope with the complex realities involved.

Research has just begun to address their coping strategies. "...the surface of understanding the insurance decision process (i.e., the consumer's search for and use of product-related information) has just been scratched'' (Slovic, et. al., 1977b, 256). The present investigation seeks to extend our understanding of decision making behavior at varying levels of product comprehension. It shifts CIP research to a normative perspective and a consideration of what should be in memory.

Specifically, consumers should have a factual grasp of the terms and concepts of insurance. The case of permanent vs. term strategies is considered. The assumption is that a grasp or comprehension of these strategies will-vary with past experience (i.e., the contents of memory). Although a complete knowledge of this product comparison is not likely to be present, the task of integrating new information should be facilitated by prior exposure to the product.

The data supports this assumption. Comprehension increases with a rating of product knowledge and a prior contact with agent. A large proportion of the low comprehension subjects have simply never seen an agent. This highlights the industry's influence on the consumer's ability to deal with the buying situation.

A relationship is found for sex of subject, but it does not appear to support the mediating role of past experience. Males, rather than females, exhibit higher levels of product comprehension. They do not, however, report any significant edge in relating to the product.

One possible explanation is that males are more involved or motivated in the study and, thus, process the description and respond to the simulation in a different way. Experimental "realism" might also play some role in the above relationships on past experience. What if comprehension is nothing more than a surrogate for motivation (i.e., a tendency to be interested in the task)?

Results argue against this interpretation. If motivation were involved, high comprehension subjects could be expected to report greater levels of certainty and validity in choice. They do not. Subjects, regardless of their product comprehension, indicate confidence in their choice and "real-world" involvement (i.e., under the assumption of purchase interest). Further, low comprehension subjects differ predictably with regard to perceived confusion (i.e., the sign of an involved subject actually experiencing gaps in knowledge).

Turning to search behavior, the data again support the mediating role of past experience. High comprehension subjects reflect the industry's preference for permanent insurance. It should be emphasized that a factual understanding of this buying situation does not direct the consumer to a specific alternative. Rather, choice is a matter of how one lends meaning to the facts. For example, what is the tendency to believe in a personal ability to invest the premium difference? Grasp of the product itself appears to be linked to a selectivity in favor of the permanent alternative.

Finally, choice behavior for males carries this selectivity to its logical conclusion. High comprehension males select the permanent rather than the term strategy. Interestingly, the reverse is true for low comprehension subjects.

The tendency for low comprehension males to select a term/invest alternative is important and warrants further attention. It suggests a basic hypothesis from Bettman's theory (1979, 106-115). To the degree that stored information is lacking, consumers can be expected to focus on external search (i.e., policy-related information). There is one clear policy difference in the two strategies. Term is significantly cheaper in annual premium. Strategically, this makes little difference in that subjects are repeatedly told to buy term with the expectation of investing the premium difference. But then, low comprehension subjects do not adequately understand this concept as measured in the objective quiz. Perhaps they recognize it at a surface level, but fall to integrate it fully into an evaluation of cost. In any case, there is a strong possibility that they are selecting this alternative for the wrong reasons.

The preference for permanent alternatives in females is not readily explained. Sex of subject does not affect search behavior in this manner. Choice is undoubtedly more complex and will require further investigation to xplore such differences.

In summary, product comprehension (i.e., in the process of reacting to a factual, "buyer's guide" description) is related to past experience. A higher level is present in males than females. It is associated with prior agent contact and a purchasing strategy heavily oriented toward the permanent alternative. Although the investigation is exploratory and correlational, its findings are consistent with an emphasis on memory and its role in product comprehension and decision making behavior.


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