Fewer Americans are buying life insurance, posing potential financial risks for households in the face of an unexpected death, experts warn.
In January 2023, only 52% of consumers had a life insurance policy, down from 63% in 2011, according to Limra, an insurance industry trade group. Similarly, data from the American Council of Life Insurers (ACLI) shows coverage dropped to 59% of households in 2019 from 69% in 1998.
Scott Shapiro, U.S. insurance sector leader at KPMG, highlights a significant “protection gap” where Americans are simply underinsured. Life insurance’s primary role is to provide financial security for loved ones if the policyholder passes away, offering a tax-free death benefit to beneficiaries.
Matt Knoll, a certified financial planner in Illinois, quips that it’s a “funny product: It’s something we buy and hope to never use.”
Why the Decline?
The decline in life insurance purchases is steady and multifaceted. Young generations are postponing life milestones like marriage, homeownership, and having children, which are key triggers for buying life insurance.
Higher costs of homeownership and childcare, alongside rising debt burdens like student loans, make younger households less willing or able to afford monthly premiums. Shapiro notes that insurance costs are also climbing.
Moreover, life insurance isn’t the easiest to buy, often requiring medical tests for underwriting. “It’s a complex transaction,” Shapiro says. Additionally, other tax-advantaged savings options, like 401(k) accounts and 529 plans, have diverted attention from the tax benefits of certain life insurance policies.
When Do You Need Life Insurance?
Life insurance isn’t for everyone. Consider your financial situation and the lifestyle you want to maintain for your survivors. Without your income, there could be a financial shortfall for household expenses, debts, or big-ticket items like tuition.
The Illinois Department of Insurance advises considering who will cover funeral costs, final medical bills, and ongoing expenses like daycare or mortgage payments.
Single individuals without kids might still need coverage for funeral expenses, medical bills, debts, and possibly financial support for elderly parents.
Choosing the Right Policy
There are two main types of life insurance: term and permanent. Financial advisors often recommend term insurance, which lasts for a specific period, such as 10, 20, or 30 years, with fixed monthly premiums. The term should align with your financial obligations. For instance, if you want to ensure your spouse is financially secure until retirement, a 30-year term might be suitable.
Permanent life insurance, like whole or universal life, lasts a lifetime and can build cash value over time. It’s typically more expensive and complex than business insurance but might be worth it for those seeking to leave a financial legacy or expecting to face future insurability issues.
Assessing Your Needs
Evaluate if your existing workplace coverage is sufficient. For example, Jim Bradley, CFP, founder of Penobscot Financial Advisors, suggests considering your goals. “Lucy and Ricky are planning to put two kids through college at a cost of $400,000 and buy a house for $200,000. They should consider covering the $600,000 shortfall with life insurance.”
Life insurance is a crucial part of financial planning. Despite the decline in purchases, the need for adequate coverage remains. Consider your personal circumstances and future needs to make an informed decision.
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