NEW YORK, N.Y., December 2, 2008 – American families, already confronting a difficult economic environment, face the danger of missing widely-held goals such as paying off a mortgage, funding a four-year college education or financing a secure retirement because they lack adequate life insurance protection, according to a major new “Life Insurance Gap” study released today.
A detailed analysis of self-reported financial objectives revealed that Americans typically have just 49 percent of the financial protection they need to achieve their own stated financial goals for their families. This Life Insurance Gap exists despite the fact that over 80 percent of American breadwinners surveyed feel they have enough life insurance coverage. The Life Insurance Gap translates into a median shortfall of almost $300,000 in coverage for the typical American family.
“Instead of asking the insurance industry to provide a statistic on how much life insurance coverage it recommends people should have, this study took a novel approach by asking respondents to decide this amount for themselves, based on what they wanted for their families,” said Brian Perlman, Ph.D., a partner at Greenwald & Associates, which conducted the study. “The results are clear: most Americans’ coverage comes up way short.”
Chris Blunt, senior vice president, New York Life Insurance Company, commented, “If we visualize the life insurance gap in the context of a cross-country trip, many Americans only have enough gas in the tank to get from New York to Omaha. As a result, millions of American families are in danger of being stuck by the side of the road, struggling to reach their financial goals, whether that means funding for a secure retirement, paying off a home mortgage or financing a college education. We’re hopeful these findings will help show American consumers that it’s not the life insurance industry telling them they need more coverage – it’s their peers, colleagues and neighbors across the country.”
“Today’s precarious economy has been a wake-up call for many Americans, demonstrating how rapidly one’s financial circumstances can change,” added Blunt. “Yet the current situation is also motivating a growing number of consumers to take renewed stock of their financial decisions, including their life insurance coverage. We may begin to see the Life Insurance Gap narrow as more Americans talk to financial advisors, reconsider their strategy and look toward adequate life insurance coverage as a step toward greater financial security.”
According to the survey, breadwinners reported a median of approximately $300,000 in life insurance coverage. Respondents were then asked about the ways they planned to use their families’ life insurance coverage if needed. Options ranged from simply replacing the breadwinner’s income to covering retirement and college expenses. Based on the responses to these questions, the median amount respondents reported they would need from the breadwinner’s life insurance proceeds was $589,378. When contrasted with the $300,000 median amount of actual life insurance coverage, the typical American family faces a 49 percent gap between their financial goals and the money they would have available from their life insurance policies, in the event of the breadwinner’s death.
The Life Insurance Gap survey examined the financial planning attitudes and behaviors of 1,003 Americans age 25 and over with dependents, with a particular focus on what they want their life insurance policies to cover in the event of the death of the breadwinner. It was commissioned by New York Life Insurance Company, the nation's largest mutual life insurer.
A Disconnect Between Perception and Reality
Despite the existence of the Life Insurance Gap, Americans believe they have enough life insurance to protect their families. About 80 percent of respondents stated that they are at least somewhat confident that they have enough coverage. Even more revealing was the fact that 64 percent believe that their standard of living would not decline if the breadwinner in the household passed away. However, according to the study, household breadwinners have enough life insurance, on average, to cover expenses for only four years after the loss of the breadwinner.
“What happens in the fifth year?” Mr. Blunt asked. “The survey makes it clear that while Americans feel they have enough life insurance coverage to cover their immediate needs in the event of the breadwinner’s sudden death, when asked more pointed questions about what their future financial needs would be, their life insurance coverage is clearly falling short. Americans are unaware that they are under-prepared, pointing to the need for education in this area.”
The study found that Americans are clearly concerned for their families’ well-being and safety. Over half of the respondents believe that it is very important to have life insurance to protect their family. However, even though most people understand the basic need for life insurance, buying it isn’t necessarily a direct result, because only 20% of respondents have enough life insurance to meet their self-reported needs. In fact, life insurance is seen as less important than many other ways people protect their families. Even though inadequate life insurance coverage can have a dramatic impact on a family’s standard of living, only about half of the survey respondents said they felt that purchasing life insurance is very important, in contrast with other critical areas for family protection such as driving safely (95%), wearing seatbelts (95%), and regularly testing smoke detectors (70%).
Inadequate Life Insurance Coverage Creates Other Risks
The survey also identified a number of other areas where American households are at risk from inadequate life insurance protection. These include:
- Covering the Whole Family: Despite the fact that it could be a financial burden to replace the work of a stay-at-home parent, 43% report having no individual life insurance coverage at all for the household’s non-breadwinner.
- The Fallacy of Conventional Wisdom: Although some commentators counsel Americans to “buy term and invest the rest”, the survey found that only 40 percent of those who planned to heed this advice actually did so – resulting in less secure life insurance coverage and less personal savings.
- Retirement Risks: With only about 20% of private sector workers covered by a defined benefit pension plan 1, life insurance can mean the difference between a fulfilling and secure retirement and one of constant struggle. The study reveals that many Americans are operating under an assumption that group coverage with their employer is portable and/or that term insurance will remain affordable. These assumptions can leave the non-breadwinner uniquely exposed in retirement upon the breadwinner’s death.
- Additional details on these points are included in the “Other Key Findings” section that follows.
“What this study makes clear is that the cost of doing nothing can be enormous,” Mr. Blunt said. “The Life Insurance Gap leaves far too many families exposed to undue financial risk, whether they’re just starting out or looking forward to their retirement years. However, by beginning to look at life insurance as an asset to be maximized rather than an expense to be minimized, we can start to close the gap and increase financial security for millions of Americans.”
The telephone survey of 1,003 consumers was conducted by the research firm of Mathew Greenwald & Associates. Participants had to be at least 25 years of age, married and/or responsible for the support of their children, and had to have annual household incomes of $50,000 or more. The sample was evenly split between men and women. The margin of error at the 95% confidence level for the 1,003 consumers surveyed is plus or minus 3.1%. The survey was concluded in May 2008.
Additional Detail on Other Key Survey Findings
Covering the Whole Family
Studies have shown that single parents would have to pay nearly $3 of every $10 they earn to cover the cost of childcare. 2 However, 43 percent report having no individual life insurance coverage on the non-breadwinner. Including both group and individual coverage, non-breadwinners have a median of $50,000 in life insurance coverage.
Term Vs. Permanent
Americans reported confusion about how life insurance works, which may contribute to the Life Insurance Gap. Only half report that they understand term life insurance very well, and fewer than four in ten understand permanent insurance. In contrast, two out of three claim to understand auto insurance well.
The survey’s findings challenged the “conventional wisdom” which counsels consumers to “buy term and invest the rest”. About one quarter of respondents who bought only term insurance for their household breadwinner indicated they did so because they felt they would invest the difference. However, only 40% of this group reported having actually saved or invested all of that money.
Life Insurance And Retirement
Over 80 percent of survey respondents believe that the breadwinner in their household is at least somewhat likely to keep their life insurance coverage for life. But the study reveals that their self-reported statistics indicate otherwise. Only about one-third of breadwinners have an individual permanent life insurance policy that will remain in place during retirement. The remainder either has no coverage, term coverage or group coverage through work or another source. Group policies are often term policies, which become very expensive or unavailable as people age. In addition, most employees lose group coverage when they leave their jobs. As a result, the likely scenario is that many Americans will not have coverage in their retirement years.
In addition, studies indicate that retirement savings is inadequate. The 2008 Employee Benefit Research Institute Retirement Confidence Study shows that one out of every two workers with incomes of $50,000 or more per year have less than $100,000 in savings and investments.
Inadequate retirement savings compounded by insufficient life insurance coverage on the breadwinner could place a serious strain on the typical American family’s household finances in retirement, leaving families exposed to a range of potential risks and expenses, including:
- Providing adequate retirement savings for a surviving spouse.
- Providing support for parents who rely on their grown children for financial assistance and/or long term care.
- Supporting “boomerang” children who return to the home.
- Leaving a legacy for one’s heirs.
- Covering estate taxes.
About New York Life
New York Life Insurance Company, a Fortune 100 company founded in 1845, is the largest mutual life insurance company in the United States and one of the largest life insurers in the world. New York Life has the highest possible financial strength ratings from all four of the major credit rating agencies. Headquartered in New York City, New York Life’s family of companies offers life insurance, retirement income, investments and long-term care insurance. New York Life Investment Management LLC provides institutional asset management and retirement plan services. Other New York Life affiliates provide an array of securities products and services, as well as institutional and retail mutual funds.
1Bureau of Labor Statistics
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|Coming Up Short: New Study Reveals Wide Chasm Between Life Insurance Coverage And Common Financial Goals for Millions of Americans|