Why life insurance is important

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September is Life Insurance Awareness Month. 

Started 20 years ago by Life Happens, a nonprofit life insurance education group, Life Insurance Awareness Month is a time the industry dedicates to educating consumers – many of whom consider life insurance an expense they can’t afford – on the true cost of life insurance, on the right time to buy a policy, on the coverage a person may need and more.

To get a better sense of the importance of life insurance and the realities of buying and owning a policy, Insure.com spoke with Alison Salka, Ph.D., a senior vice president and head of research at LIMRA, the life-insurance industry research group. 

A lightly edited version of the conversation follows.

Insure.com: Many people buy life insurance to cover burial and final expense costs. But what are the other advantages of getting life insurance?

Salka: According to the 2023 Insurance Barometer Study, covering burial costs and final expenses is the most common reason people buy life insurance. Sixty percent of owners said that was a major reason they purchased life insurance. That said, it’s not the only reason people buy it. Life insurance can meet a number of needs beyond final expenses.

It can also be used:

• To replace income. The benefit can help a family maintain their standard of living and cover daily expenses. Twenty-eight percent of people told us this was a major reason they bought insurance.
• For estate planning. It can be a tool to transfer wealth or leave an inheritance to heirs or beneficiaries ― 38% of people own insurance for this purpose. It can provide financial security that lasts years or even generations.
• To cover estate taxes and create estate liquidity. This will ensure that loved ones receive the assets intended for them. Twenty percent of people cited this as a reason for buying insurance.
• To help with debt. Life insurance can cover debts like mortgages, car loans, or credit card balances. A quarter of respondents told us they have insurance to pay off a mortgage.
• For charitable giving. You can name a charitable organization as the beneficiary of your life insurance policy, allowing you to donate to a cause you care about. Seven percent of people told us this was a major reason for buying insurance.
• To fund long-term care. Some life insurance policies offer riders that allow someone to access the death benefit to cover long-term care expenses if they become chronically ill.
• For retirement income. Certain types of life insurance, like permanent life insurance, can accumulate cash value over time. You can withdraw or borrow against this cash value to supplement your retirement income.
• For education funding. Life insurance can also be used to ensure that children or grandchildren can fund their education.
• For business continuity. A business owner can use life insurance to fund buy-sell agreements, ensuring that their business can continue to operate smoothly in the event of a partner’s death.

Of course, the type and amount of life insurance you need will depend on your specific financial goals and circumstances. It’s important to work with a financial advisor or insurance professional to determine the most suitable life insurance strategy for your needs.

Insure.com: According to LIMRA, there are some 100 million Americans who don’t have life insurance or who don’t really have enough life insurance to provide sufficient financial protection for their families. What’s holding people back?

Salka: LIMRA measures the life insurance gap every year. This gap measures the difference between the number of people who say they need insurance and the number who actually have it. In 2023, 41% of American adults say they need life insurance or need to obtain more life insurance coverage. This represents over 100 million U.S. adults.

One way the gap can be closed is by reaching out to underserved markets. For example, women are less likely to own insurance than men, even though they are 48% of the workforce and control significant ― and growing ― assets. Making deliberate efforts to reach this segment of the market could help close the ownership gap and expand financial security.

The gap can also be closed by making it easier to buy insurance. This means being easy to work with. Many carriers have been building their digital capabilities for exactly this reason. They also are focused on increasing the speed to issuing a policy.

In recent years, more companies have been offering accelerated underwriting. They are using different data sources and predictive models to replace some of the more cumbersome requirements like paramedical exams or fluids.

Creating a process that is easier and less invasive may encourage more individuals to take the steps to get the coverage they know they need. According to our research, nearly half of Americans ― 48% ― say they are more likely to purchase coverage using accelerated underwriting.

Insure.com: Some people look at life insurance as something that’s complicated and hard to get. Is that true?

Salka: Life insurance can seem complicated, especially when you consider the different types and features available. More than half of uninsured Americans say they have put off purchasing coverage because they don’t know what to buy or how much they need. However, it doesn’t have to be overly complex, and its complexity largely depends on your specific needs and goals.

You can simplify the process by considering your needs, getting a basic understanding of products, and working with a professional.

Start by identifying your financial goals and the specific purposes you want the life insurance to serve. Are you looking for income replacement, debt protection, or estate planning? Then you can educate yourself about the different types of life insurance and their primary features. It’s always a good idea to get professional guidance. A good agent or advisor can help you navigate the options, assess your needs, and recommend suitable policies.

Remember that insurance needs can change over time because of life events like marriage, having children, or changes in financial circumstances. Regularly review your policy to ensure it still aligns with your needs.

Taking a systematic approach to understand your needs and getting expert advice can simplify the process and help you make informed decisions about coverage.

Insure.com: Is there a policy that’s simple and easy to get that most people should consider?

Salka: For many people, especially those looking for a simple and easy-to-get life insurance policy, term life insurance is often the most suitable option. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and is designed to provide a death benefit to your beneficiaries if you pass away during the term of the policy.

Term life insurance is generally more affordable than permanent life insurance options like whole life or universal life. This makes it accessible for individuals on a budget. It’s also a simple product. You select the coverage amount and the term length. If you pass away during the term, your beneficiaries receive the death benefit. There are no complicated investment components or cash value considerations. These policies may also have more simple underwriting processes.

In addition, many term life policies are renewable, meaning you can extend the coverage at the end of the term without a new medical exam. Additionally, some term policies are convertible, allowing you to convert them into a permanent policy if your needs change in the future.

Knowing your financial goals, budget, and coverage requirements are the first step. Consulting with an insurance professional can help you make an informed decision and find the most simple and suitable policy for your circumstances.

Insure.com: September is Life Insurance Awareness Month. If you could make Americans aware of one thing about life insurance, what would that be?

Salka: It’s important to know that the number one reason people say they don’t buy the coverage they say they need is “it is too expensive.” Yet a majority of Americans vastly overestimate the cost of life insurance. 

When we asked consumers to estimate the cost of a $250,000 term life policy, consumers overestimated the cost by as much as three times. Younger consumers overestimate the cost by as much as fivefold. Only a quarter ― 24% ― of all respondents correctly estimated the true cost of a term life insurance policy. Year after year, consumers greatly overestimate the cost of life insurance.

Our industry needs to overcome misconceptions about the cost and accessibility of life insurance to help consumers begin the buying process.

John McCormick

 

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John was a deputy editor at The Wall Street Journal and had been an editor and reporter at a number of other media outlets where he covered insurance, personal finance, and technology.