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Experts say fewer Americans are buying life insurance than in the past, a sign that families may face financial risks in the event of an unexpected death.
About half (52%) of consumers had life insurance in January 2023, from below In 2011 the figure was 63%, according to a poll by insurance trade group Limra.
Data from the National Association of Insurance Commissioners, a group of state insurance regulators, show a similar trend: In 2019, insurance coverage Already fallen The proportion of households increased from 69% in 1998 to 59%.
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“I’m very aware that there’s a big gap here,” said Scott Shapiro, head of U.S. insurance at KPMG. “Americans are really underinsured and there’s a real protection gap.”
The main purpose of life insurance is to provide financial security to loved ones in the event of the death of the policyholder. At that time, the beneficiary will receive the death benefit (i.e. Generally speaking duty free).
That makes it “an interesting product: We buy it and hope we never need to use it,” says Matt Knoll, a certified financial planner in Moline, Illinois.
Why life insurance purchases are on a ‘steady’ decline
Many Americans fail to do so Plan for their death in advance and neglect to draft a will, create a power of attorney, or name beneficiaries for financial accounts.
Overall, the proportion of households with life insurance has declined “steadily” since the early 1970s, the NAIC said.
There could be many reasons for this decline.
For one thing, younger generations are delaying major financial and life milestones like getting married, buying a home, and having children compared with older generations. Each of these factors is often a key trigger for buying life insurance, experts say.
Noll, a senior financial planner at the Planning Center, said rising housing and child care costs, coupled with increased debt burdens such as student loans, may mean young families are less willing or able to pay their monthly insurance premiums.
Insurance costs themselves are generally rising for consumers, Shapiro said.
Additionally, life insurance is often not easy or quick to purchase due to factors such as covering medical tests, Shapiro said.
“This is a complex transaction,” he said.
Knoll said there are more benign factors at play: For example, fewer consumers are seeking the tax benefits of certain life insurance policies as other tax-advantaged savings options such as 401(k) accounts and 529 plans become available.
That said, even though fewer people are buying life insurance, “I do think there’s a need,” he added.
However, life insurance is not necessarily suitable for everyone. Here are some key considerations.
When to buy life insurance
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consumer should be considered Their financial situation and the standard of living they want to maintain for survivors, such as dependents or spouses, according to the Illinois Department of Insurance.
If the policyholder has no income, there may be a financial shortfall to cover large expenses such as daily household expenses, debts and school fees.
“Who will be responsible for your funeral expenses and eventual medical expenses? Will your family need to relocate? Will there be sufficient funds for future or ongoing expenses, such as day care, mortgage or college costs?” the department said in Consumer Guide expressed in.
Single people without children may also have financial obligations they want to insure, the department said. IDOI says these expenses can include funeral expenses, medical bills, debt such as credit cards or student loans, and financial support for elderly parents.
What type of life insurance to buy
There are two broad categories of life insurance: term insurance and permanent insurance.
term insurance Financial advisors say it’s usually best for most consumers.
These policies have a specified term, which may be 10, 20 or 30 years. They usually pay a fixed monthly premium.
The length of a person’s financial obligations can be a good guide to the term one should choose, Shapiro said.
I’m very aware that there’s a big gap here.
Scott Shapiro
KPMG U.S. Insurance Leader
For example, if the policyholder’s spouse is 35 years old and the policyholder seeks a financial hedge until the spouse retires (perhaps age 65), the buyer may select a 30-year term. Ensuring there is enough money to send young children to college may mean establishing a policy that lasts about 20 years.
Permanent life insurance, such as a whole life policy or a universal life policy, is designed to last a lifetime.
It may make sense for a consumer to purchase a whole life policy if they want to leave a financial legacy to a charity or if they have reason to anticipate developing a health condition that would make it more difficult to obtain coverage later.
Permanent insurance is typically more expensive and complex than term insurance, advisers say. For example, in addition to the insurance component, it often comes with an interest-bearing account.
Over time, policyholders can accumulate cash value based on factors such as dividends or investment returns. cash value Can be used in many ways: Pay the insurance premium as collateral for a loan, or as cash if the buyer surrenders the policy in the future.
However, advisers say there are a lot of fine print and consumers should avoid buying something they don’t understand.
How much life insurance can you get?
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Knoll said every buyer’s situation is different when it comes to hedging financial risk.
Some consumers may want a policy that pays survivors the equivalent of all future annual income for several years, he said. Others may want to pay off just debt or their children’s college education, or some combination of those and other expenses, Knoll added.
Consumers can purchase life insurance through their workplace. If so, evaluate whether additional funding is needed.
This is one example Jim Bradley, CFP, founder of Penobscot Financial Advisors in Maine, said they plan to put their two children through college for $400,000 and buy a house for $200,000. Life insurance to cover the shortfall, in this case $600,000.
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