Why people who need more insurance usually end up buying less


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People buy insurance to protect themselves and their families from financial risk, especially risks that are too big to cover with savings, like car accidents, house fires, or death. When times are tough, you’d expect people to become more dependent on insurance because they’re less able to handle financial risks on their own. But economists say the opposite seems to be true — rich households tend to be better insured than poor households, and one reason is because you have to pay for insurance upfront.

There’s a lot of conflicting evidence about when the next recession is coming, but it’s worth looking at what people do with their insurance coverage during downturns, and how to handle yours.

Do people buy less insurance during downturns?

Adriano Rampini, a finance professor at Duke University’s Fuqua School of Business, co-authored a working paper with fellow Duke professor Vish Viswanathan that says households prioritize their immediate finances over future risks when deciding to buy insurance.

“The broad pattern it suggests is when households are less well off, then they will, at the margin, reduce the extent of insurance and at times completely forgo it,” Rampini says.

The authors created a mathematical model that suggests the reason for this is because of how you pay for insurance. To stay covered and remain eligible for making claims, you first have to pay your premiums regularly. You can adjust your level of coverage, but there isn’t always flexibility to pay more when you’re flush or less when you’re pinched. 

“When you’re particularly constrained, you have to make ends meet, and you’re thinking about your limited resources and how to use them,” Rampini says. 

This tradeoff results in “insurance inequality,” where rich households, who have less of a need for insurance, are better insured than poor households. The poorer households aren’t making a mistake, Rampini says — it’s just that they have tougher decisions to make with their finances.

Insurance ends up working like a luxury good, which means you buy more of it when your income is higher, when it should probably work the other way around.

The data bears this out: Households are more likely to go without health and car insurance during recessions. The result is the people who are the least well off, and the least able to weather financial risks without insurance, are the most likely to be under- or uninsured.

In a working paper published in the National Bureau of Economic Research in 2021, Camelia Kuhnen and Michael Gropper examined administrative data from a financial services firm for 63,000 people from September 2015 through 2019, and found “a very strong positive relationship between a person’s wealth and the extent of coverage secured through life insurance and homeowners and other property-related insurance, controlling for the value of the insured asset.”

In other words, “as a person’s wealth or income changes, so does their coverage,” says Kuhnen, a professor of finance at the University of North Carolina’s Kenan-Flagler Business School. 

“In a downturn, I expect to see that those experiencing a drop in income or wealth will have a heightened probability of lapsing their insurance coverage, or reducing their coverage limit, for life insurance or property insurance,” Kuhnen says.

Research on life insurance policies found that people living in areas with low home prices and low income growth were more likely to stop paying their premiums during the recession of 2007 and 2008. 

This “risk management paradox” exists in the business world as well, Rampini says. Small businesses, who are more vulnerable to economic risks, are less likely to take steps to hedge against those risks, because they don’t have the finances to do so. 

In a study published in 2014, Rampini, Viswanathan, and Amir Sufi looked at the airline industry. Airlines have to contend with the volatility of jet fuel prices, and use financial strategies to hedge against the risk of high prices. Similar to households and insurance, the study found that airlines with higher net worth, cash flow, and credit ratings tended to hedge more. Rampini says farmers in India exhibit similar behavior, with better-off farmers buying more rainfall insurance than poorer farmers.

“We see it in corporate America, we see it in households in the U.S., we see it in villages in India,” he says. “It’s the basic same pattern.”

Rampini hopes future studies can track household income and insurance coverage over time. 

How should you adjust your insurance coverage during a recession?

Nicholas Bunio, a certified financial planner, says it’s OK to reduce insurance coverage during tough times. But make sure you have adequate coverage.

For example, if you have a $3 million term life policy, you may want to reduce the death benefit to $1 million if you’re struggling to afford the premiums. 

“But of course, cutting it all out is wrong,” Bunio says. “Because once something happens, that’s it. There’s no going back.”

The same goes for home and car insurance, he says. Bunio makes sure to review insurance coverage with his clients regularly to see whether they need to increase or decrease coverage.

Sometimes insurance companies will give you discounts for paying your premium annually or every six months instead of every month. It could be a good idea to do this when you have extra cash, and spread out the payments when times get tight. 

When you’re buying insurance, shop carefully. Many people buy insurance when they have disposable income, but consider whether you can afford the premium even if times get tight. 

“Reducing the level of coverage will be much more advisable than lapsing altogether,” Rampini says.

This article originally appeared on PolicyGenius and was syndicated by MediaFeed.

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Understanding the life insurance application process

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.

Related: Life insurance 101: 6 pointers to get you started

SolisImages / istockphoto

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.


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.


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.


Here are the answers to some common life insurance  questions you may have.


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.


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.


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.


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.


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.


Correct, not all agencies charge commission.


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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Myles Ma

Myles Ma is an editor at PolicyGenius.com.