The Facts of Life (Insurance)

Most U.S. Households Are Underinsured and At Serious Financial Risk. According to a recent Trends in Life Insurance Ownership Study conducted by the Life Insurance Marking Research Association:

• 30 percent of U.S. households have no life insurance protection at all and 25 percent of those make the potentially devastating mistake of relying solely on employer-provided group policies.

• Only 44 percent of U.S. households have individual life insurance. This is a 50-year low.

• Fifty percent of U.S. households say they need more life insurance. This is the highest level ever.

• Among households with children under age 18, 40 percent say they would immediately have trouble meeting everyday living expenses if a primary wage-earner died. Another 30 percent would have trouble keeping up with expenses after only a few months. This means that fully 70 percent of American households with children under 18 would be in immediate or short-term financial jeopardy if a bread-winner died.

• Almost 80 percent of American households do not have a personal life insurance agent or broker to turn to and most of them say they never did.

What Is Life Insurance?

The main purpose of life insurance is typically to make up for the loss of income, loss of contributions, and the economic value of a deceased individual. It is often said that life insurance is not for those who die - but rather for those who live. And it is. When the insured dies, the beneficiaries receive a sum of money (the policy's face amount) from the life insurance company and can use the money for any purpose including: replacing your income; protecting the family home by allowing the mortgage to be paid-off or providing funds to meet future rent obligations; providing college education funding; payment of final expense and estate settlement costs; retirement funding for surviving spouse of other family members; providing business continuation funding; and charitable contributions after your death.

Why Do I Need Life Insurance?

Quality life insurance is perhaps the single most important financial asset you can own as it protects those whom we care about the most from financial loss. Life insurance is unique is that the cost of the premiums paid is typically only a fraction of the benefit paid to the beneficiaries. The policy benefit is available when it is needed most - very quickly after your death - and can generally prevent your beneficiaries from having to liquidate other assets to meet costs and income replacement needs. The benefits your beneficiaries will receive are generally income tax-free. See "The Obligation to Provide Life Insurance."

The founding premise of life insurance is the same today as it has always been - it provides financial protection to those left behind helping to replace the resulting "economic impact" on their lives. Life insurance can be used to replace lost income, pay estate taxes, provide an estate that can be left to future generations, replace charitable donations, even lessen the financial impact of the loss of a small business owner. Whatever the use, life insurance provides financial protection for others - pure and simple. Here are just a few scenarios:

Families

This is the most obvious group of people with a need for life insurance protection. The death of one or both breadwinners in a family would typically result in severe financial hardship. The need is obvious and even magnified when families have young children or dependent parents.

Non-Working Parents

Even in cases where one spouse is not working and there is no income to replace, the need for life insurance can still be quite great. Consider the substantial costs involved in having to replace the role of a stay-at-home parent or care giver whose services are vital to the continued well being of the family.

Working Couples With No Children

Perhaps you have an elderly parent or other family member whose continued care is your responsibility? Or, maybe you don't have some large loans that will need to be paid-off?

Older Adults

While the basic need for life insurance may diminish as children grow and finish school and you are able to save some money, many older Americans use the tax advantages of life insurance as a way of leaving an estate for children and grandchildren. This is especially true of individuals with modest wealth. Wealthier individuals may want to use life insurance as an effective way to meet estate tax and other financial obligations at the time of their death. Life insurance can also provide tax advantages when used for charitable giving.

Business Owners & Self-Employed Individuals

Life insurance is a popular and effective way to plan for family business succession, or as an employee benefit. Many small business owners use cash value life insurance to supplement their savings and provide additional retirement income.

How Much Life Insurance Do I Need?

Boston University economics department chairman Dr. Laurence Kotlikoff has conducted a variety of research projects with other highly respected economists and has come to these startling conclusions:

• Virtually all households in the United States are underinsured.

• The lack of adequate insurance accounts for most of the poverty among widows and widowers.

• There is almost no relationship between the amount of insurance people have and the amount they actually need.

So, how much life insurance should we have? Professor Kotlikoff's research suggests that virtually all of the traditional calculation methods underestimate the amount of life insurance needed compared with the method economists prefer which is called "Consumption Smoothing" and is based on the research of Nobel Prize winning economist Franco Modigliani. The mathematics is esoteric, but the bottom-line is common sense. The idea is simple: that human beings try to smooth their consumption over their lifetimes and avoid "disruptions" which threaten their standard of living. For economists, as well as the rest of us, death qualifies as a major disruption. Since the vast majority of American families are severely underinsured, they are in peril of having their standard of living decline severely when family members die.

While there is no magic formula, and everybody's situation is somewhat unique, a good starting point is 10 to 12 times your annual income. To that figure you may want to add an amount needed to pay-off your mortgage and other loan balances or to fund your children's education or provide for a parent or other "special needs" situations. Many people are surprised at how much life insurance coverage they really need especially to replace the income of a deceased wage-earner. Studies have consistently shown that long-term financial condition of households is directly dependent upon adequate levels of life insurance coverage and that underinsured households are not much better off than those without life insurance. Remember the younger you are and the better health you are in, the lower your premium will be. To get a better idea of your personal life insurance needs, complete the Life Insurance Needs Analysis Worksheet (this can also be accessed from the home page of this website).