Fewer Americans are buying life insurance. Here’s when you might need it

Fewer Americans are buying life insurance than in the past, which suggests households may be at financial risk in the event of an unexpected death, experts said.

About half, 52%, of consumers had a life insurance policy in January 2023, down from 63% in 2011, according to a poll by Limra, an insurance industry trade group.

Data from the National Association of Insurance Commissioners, a group of state insurance regulators, shows a similar trend: By 2019, coverage had fallen to 59% of households from 69% in 1998.

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“It’s absolutely clear to me there’s a very large gap here,” said Scott Shapiro, U.S. insurance sector leader at KPMG. “There’s a literal protection gap where Americans are flat-out underinsured.”

The main purpose of life insurance is to provide financial security for loved ones if the policyholder dies. At that point, beneficiaries receive a death benefit (which is generally tax-free).

That makes it “kind of a funny product: It’s something we buy and hope to never have to use,” said Matt Knoll, a certified financial planner based in Moline, Illinois.

Many Americans fail to plan ahead for their mortality, neglecting to draft wills, put a power of attorney in place or designate beneficiaries for financial accounts.

Overall, the share of households with life insurance has “steadily” decreased since the early 1970s, according to the NAIC.

There are likely many reasons for that drop-off.

For one, younger generations are deferring big financial and life milestones like getting married, buying a home and having kids relative to older generations. Each is generally a key trigger to buy life insurance, experts said.

Higher costs for homeownership and child care coupled with rising debt burdens (for student loans, for example) may mean younger households are less willing or able to pay monthly insurance premiums, said Knoll, a senior financial planner at The Planning Center.

Insurance costs themselves are also generally rising for consumers, Shapiro said.

Additionally, life insurance is often not typically easy or quick to buy due to factors like medical testing for underwriting, Shapiro said.

“It’s a complex transaction,” he said.

There are more benign factors at play, too: For instance, fewer consumers have sought out the tax benefits of certain life policies as other tax-advantaged savings options like 401(k) accounts and 529 plans have come into existence, Knoll said.

That said, even as fewer people buy life insurance, “I do think there’s a need for it,” he added.

Life insurance isn’t necessarily right for everyone, though. Here are some key considerations.

Consumers should consider their financial situation and the standard of living they want to maintain for survivors (like dependents or a spouse), according to the Illinois Department of Insurance.

Absent a policyholder’s income, there might be a financial shortfall in paying day-to-day household expenses, or for debts and big-ticket items like tuition, for example.

“Who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments, or college?” the department said in a consumer guide.

Single people without kids may also have financial obligations for which they want to insure, the department said. Those may include funeral expenses, medical bills, debts like credit cards or student loans, and financial support for elderly parents, the IDOI said.

There are two broad types of life insurance: Term and permanent.

Term insurance will typically be best for most consumers, according to financial advisors.

These policies last for a designated term, perhaps 10, 20 or 30 years. They generally carry fixed monthly premiums.

The length of one’s financial obligation is a good guide to the term one should choose, Shapiro said.

If a policyholder’s spouse is 35 years old and the policyholder seeks a financial hedge until their spouse retires — perhaps at age 65 — the buyer might choose a term of 30 years, for example. Ensuring there’s enough money for young kids to go to college might mean having a policy that lasts about 20 years.

Permanent life insurance, such as a whole or universal life policy, is meant to last throughout life.

It may make sense for consumers to pay for a lifelong policy if they want to leave a financial legacy for charities, or reasonably expect to develop a medical condition that can make it harder to get insurance later.

Permanent insurance is generally more costly and complex than a term policy, advisors said. For example, it often carries an interest-bearing account in addition to the insurance component.

Policyholders can build up cash value over time depending on factors like dividends or investment returns. The cash value can have various uses: to pay insurance premiums, as collateral for a loan, or as cash in the event a buyer surrenders their policy in the future.

However, there’s a lot of fine print and consumers should avoid buying something they don’t understand, advisors said.

Each buyer is different when it comes to hedging against financial risk, Knoll said.

Some consumers may want a policy that would pay survivors the equivalent of all future annual income for years into the future, he said. Others may wish to replace only their debt obligations or kids’ college educations, or some combination of these and other costs, Knoll added.

Consumers may have life insurance coverage through their workplace. If so, assess whether additional funds are needed.

Here’s an example of what a household might need, according to Jim Bradley, CFP, founder of Penobscot Financial Advisors based in Maine: “Lucy and Ricky are planning on putting two kids through college at a cost of $400,000 and purchasing a house for $200,000. They haven’t been able to accumulate much toward these goals. They should consider covering the shortfall, in this case $600,000, with life insurance,” he wrote.