After peaking in 1971, the percentage of families covered by life insurance has dropped steadily, from a high of 85.4% to 59.4% in 2019. Financial experts say life insurance is still a “huge need.” So why don’t more people buy it?
Changes in demographics
Older households have a disproportionate amount of wealth in the United States. And older, wealthier households don’t need as much life insurance because they have more savings and don’t need it to stretch as far, says Puneet Prakash, professor and chair of the risk management and insurance program at Missouri State University.
On the other hand, many younger people are struggling with student debt and affording homes, making life insurance less of a priority. [2]
“Young folks typically don’t have the money,” Prakash says.
Having children is one of the biggest triggers for buying life insurance, but young people are putting that off. Census data shows many Americans are having children later.
Changes in tax laws
In its heyday, life insurance was a popular vehicle for tax-advantaged savings. “People used to have life insurance for purposes of estate planning,” Prakash adds.
Life insurance proceeds are typically not subject to taxation. But the size of the exemption from the estate tax increased drastically in 2018, meaning only the wealthiest estates have to pay.
And since the 1970s, new ways of saving money without paying taxes have emerged, like 529 plans, health savings accounts, and Roth individual retirement accounts, giving people specialized ways to save tax-free for education, medical expenses, and retirement, respectively.
Changes in how life insurance is sold
A large and growing percentage of life insurance sales are handled by independent agents, meaning agents who can sell products from multiple insurance companies. Most of the population, Prakash says, “doesn’t have access to these agents, or brokers, or financial planners.”
These agents tend to work with wealthier clients. That explains why, even as the percentage of the population covered by life insurance has dropped, the face value of active life insurance policies has held steady, hitting a high of $21.2 trillion in 2021.
“Even though the number of policies sold has steadily declined, the dollar amount of coverage has actually gone up,” Prakash says. “That tells you it’s only the high-net-worth individuals who are buying this.”
Even as the number of active life insurance policies has dropped, their face value has reached new heights, as data from the American Council of Life Insurers shows.
Why you need life insurance — even if you’re not rich
Many people don’t grasp the repercussions of going without life insurance, says Anna Sergunina, a certified financial planner and CEO of MainStreet Financial Planning.
“In my experience working with clients, I have observed that many individuals lack a clear understanding of the reasons why they need insurance, how insurance functions, and what type of life insurance policy is most suitable for them,” she says.
Many people end up settling for “bare minimum” policies provided by their employers, which are often limited in their coverage amounts. You also probably won’t get to keep it if you lose your job.
In general, anyone who has shared debts or has someone who depends on their income should consider getting life insurance coverage. Delaying can be costly, since life insurance rates tend to increase with age.
Kevin Brady, a certified financial planner and vice president of Wealthspire Advisors, agrees that insurance agents have gone away from selling cheaper term life policies and toward selling more expensive whole life policies to wealthier clients.
“However, that is not to say that life insurance is not needed,” Brady says. “I do believe that there is a huge need for the death benefit protection it provides; it’s just that the coverage is often best provided by cheaper term life insurance.”
High-net-worth households aren’t the only ones that can benefit from life insurance. In fact, people with less wealth should probably have more insurance coverage because they aren’t as able to deal with financial risks. Brady says anyone who is the breadwinner in a single-income household, and who has dependent children needs to have life insurance.
Even younger couples without children should consider buying term life insurance, Brady says.
“Everyone is different, but health issues can pop up out of nowhere,” he says.
This article originally appeared on PolicyGenius and was syndicated by MediaFeed.
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Understanding the life insurance application process
So, you’ve honed in on the kind of life insurance that fits your situation, the amount you might need and the length of time you predict you will need coverage. To obtain a policy, the first step is to fill out an application with your carrier of choice.
The insurance company will review it for completeness. If any information is missing, the insurer will likely follow up to ensure that the application is completely filled out. Some carriers may conduct a phone interview when someone applies, while others do so only if an application is incomplete.
Then comes the underwriting process. During underwriting, carriers review the application with an eye toward the steps that will be needed to determine what a premium will be for a particular applicant.
They will, for example, review height and weight to see what health category a person falls into based on body mass. They will also determine what kind of medical exam and/or physician statement will be required.
Processes can vary somewhat from one insurance carrier to another, but at the core of it all, carriers are trying to determine risk factors. They use actuarial tables to help gauge how risky it would be for them to issue a particular life insurance policy, and then price the policy accordingly.
One key table focuses on mortality. A carrier would look at a person’s age and gender to determine the average years of life the applicant would likely have left, all other things being equal. Can they predict that with certainty? Of course not. But this is a core part of the process nevertheless.
Of course, not all people have the same degree of health, and neither do their families. This is why life insurance applications ask about family health history and a person’s health history and lifestyle.
Questions about family health history will focus on diseases relatives have had that can affect an applicant’s lifespan expectancy—because some diseases can have a hereditary component. The queries will almost certainly include questions about significant diseases experienced by parents and siblings, including cancer, heart disease, and diabetes.
For each disease listed, the insurance company will likely want an applicant to list the age at which the medical condition first appeared, and, if the family member is deceased, the age of death.
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Besides asking about height and weight for actuary tables— and a date of birth — the application will ask personal lifestyle questions, including about smoking, alcohol use, recreational drug use and hobbies that could be considered high risk. There can also be questions about exercising habits.
Personal health questions can include “yes” and “no” answers to a variety of medical conditions, plus request a list of prescription medications taken and surgeries performed.
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A life insurance carrier will sometimes require a medical exam before issuing a policy.
The exam may be similar to a person’s regular annual physical. A medical tech will likely ask questions that are similar to those on the application, and a professional will conduct a physical exam. It can include measuring height and weight, checking blood pressure and taking blood and urine samples.
In some cases, an EKG may be performed to measure the electrical activity of the heart. Men over age 50 may need to have a prostate-specific antigen test done to check prostate health.
When medical exams are required in applying for life insurance, it’s part of the underwriting process that helps a carrier understand the risk level of insuring the applicant. The tests performed can indicate if a person has high blood pressure, high cholesterol, elevated glucose or other health issues.
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Before answering any life insurance application questions, a consumer will need to decide what kind of policy makes sense, the dollar amount to request and from what carrier.
One key consideration is whether to go term or perm: if a term life policy makes sense or if a permanent-life policy would be better.
Term life and whole life insurance have important differences. Term life is simpler and more straightforward. Someone purchases a policy for a certain dollar amount and term, and then has life insurance coverage for the designated time period (10, 20, 25, or 30 years, for example).
If the policyholder keeps up premiums and dies within that term, beneficiaries will receive the appropriate payout. Monthly payments are generally fixed with term life policies.
Reasons people choose term life include:
- Term policies almost always cost less than whole life, usually significantly so.
- Policyholders predict they’ll have enough money saved by the time the policy expires.
- Beneficiaries are expected to be financially independent by the time it expires.
Whole life policies, which also require regular payments, are intended to last the holder’s entire lifetime — there is no expiration date. They cost up to 10 times as much as a term life policy because part of that money is invested into what’s called the policy’s cash value.
Policyholders can typically borrow against their cash value at an interest rate that’s specified in their policy. They may also be able to cash in their policy to receive money; that action closes out the whole life policy. Whatever is left over after the policyholder dies will be distributed to beneficiaries.
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Here are the answers to some common life insurance questions you may have.
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Yes, because carriers generally base policy price on risk factors, buying a policy when you’re young and healthy typically means lower premiums. Plus, with some term life insurance policies, buyers can lock in pricing when they purchase and locking in at a low rate can be a financial plus.
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Yes, some insurance carriers do allow this kind of flexibility. Current policyholders can check with their carrier. New applicants can check with the carrier to see what kind of flexibility is provided. If that’s important to them, they can choose a carrier that provides what they desire.
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Maybe, although it can be good to have that benefit, these policies are generally in the amount of one to two times an employee’s salary.
That’s typically not enough to address debt and provide sustained financial help to beneficiaries, which is why it may make sense to purchase a second policy.
Plus, employer plans may not be portable. If the employee leaves the company, the policy may be terminated.
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Each person’s situation is unique. Some use the DIME formula to determine the right amount. That acronym stands for debts, income, mortgage and education.
What will be needed to cover all of those bases? To streamline the process, you might want to calculate your life insurance needs.
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Possibly, an agent can educate a consumer about what’s involved in getting a life insurance policy. This can be especially helpful if the process seems overwhelming.
Many agents work on commission, so using one that does charge a commission will cause the cost of the policy to go up. Higher commissions are typically charged on whole life policies than on term life.
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Correct, not all agencies charge commission.
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For some people, it could be tempting to downplay personal health issues when filling out a life insurance application.
That is never a good idea. If someone didn’t fully disclose the truth about their state of health and died within two years of getting a policy, the insurance company can delve into the details. If information is found to be lacking or inaccurate, the carrier can deny beneficiaries the payout.
Learn more:
This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
Ladder Life term life insurance policy made available through Ladder Insurance Services, LLC (Ladder) and underwritten by Fidelity Security Life Insurance Company, Kansas City, MO. Product availability and features may vary by state. Not available in New York. The California license number for Ladder is OK22568. Policy Form No. ICC17-1069, M01069, Policy No. TL-146.
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Evgenij Yulkin
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