One of the biggest challenges for the life insurance industry as a whole is the gap between how such coverage is perceived among the American public and what they actually do to obtain it. Broadly speaking, people recognize life insurance as an important part of their long-term financial planning, but don't follow through nearly as much as they feel they should to actually seek out the coverage that's right for them.
This problem may be particularly pervasive among parents, whose financial obligations to their children are clearly understood, but well below half of parents in any family situation actually have coverage of any kind. In a recent survey of parents' financial standings, Policygenius found that married parents were the most likely to have some sort of individual life insurance policy in place, but only 43% fell into that category. Separated, divorced or widowed parents only had such coverage 29% of the time, and just 20% of never married, single parents had life insurance.
Nearly half of parents without life insurance said they are concerned about being financially prepared to have a child, versus fewer than 1 in 3 who felt the same way after obtaining such coverage. Interestingly, though, only 5% or 6% of parents in all these situations said a shortfall of insurance coverage was among their financial concerns. Instead, they tended to be far more worried about paying down debt, saving for retirement and building an emergency fund.
Why don't people follow through on life insurance needs?
Part of the reason why many parents may not have the follow-through they need on seeking out life insurance is described in a recent eMoney poll: More than 2 in 5 people today say they feel stressed or confused, even embarrassed, about discussing their personal finances, and 20% do not talk about these topics with anyone at all.
In fact, almost two-thirds have never even consulted with a financial advisor who can explain their situations to them in clear terms, and people are most likely (37% of the time) to turn to parents or family members for such advice instead. Another 30% say their spouse is their guide in these matters, and fewer than 1 in 4 actually turn to a financial professional first.
Strangely, almost 1 in 3 people who do work with a financial professional on a regular basis aren't totally forthright about their money habits, meaning the advice they receive isn't going to adequately help them find the best possible path forward, whether it comes to buying life insurance or otherwise building their long-term financial strategy.
What's the issue?
Meanwhile, the latest Insurance Barometer Report from Life Happens and LIMRA sheds even more light on the subject. It found that consumers have a general lack of knowledge about what life insurance costs, and typically estimate the price tag of such a policy as more than three times higher than it actually is.
"Only 13% of households have shopped for life insurance in the last two years."
That misconception is quite serious, but can be explained thusly: Only about 1 in 8 households (13%, or 17 million total nationwide) have seriously shopped for such coverage in the last two years, and just 1 in 10 (10%, or 13 million) got a quote during that period. Further down the funnel, roughly 1 in 16 (6%, or 8 million) actually purchased coverage. All those numbers were down slightly from the previous survey, and perhaps not surprisingly, those who did purchase life insurance after shopping were more likely to buy more affordable term coverage.
The most common reason for not buying more life insurance in that two-year period - cited by nearly a third of respondents - was feeling they had enough coverage already. However, 22% said it was because they had other financial priorities, and 15% thought they couldn't afford it. Just 3% said they were wary of life insurance as a product in general, and that number was down from 5% in 2017.
In all, while two-thirds of consumers said they know they need life insurance, only 57% actually had any at all. Moreover, just 20% of people who don't have life insurance said they had sufficient knowledge about the products available.
What's right for parents?
Although there is no hard and fast rule about what constitutes the proper amount of life insurance, the general rule of thumb is enough to replace your current salary by about 10 times or more. That is to say, households in which parents collectively earn $100,000 per year should have about $1 million in coverage, though these numbers can vary widely based on a given consumer's financial situation, and thus requires a careful look from financial professionals to fully assess.
With that in mind, those in the life insurance industry have a vested interest in improving outreach efforts and generally doing more to consumers who thought they couldn't afford coverage know what life insurance covers - and what it actually costs. This kind of effort will help guarantee people get the policy that's right for them and their children going forward.