First-Ever “Life Insurance Gap” Study Finds That Many Americans Have Just Half the Life Insurance Protection They Need to Meet Their Own Self-Described Financial Objectives

by Efin Advisor | December 7, 2008

With only about 4 years’ worth of coverage in the event of a breadwinner’s death, family goals like college funding and retirement planning are put immediately at risk –95% of Americans make it a priority to protect their kids by using seatbelts, but only 20% have enough life insurance for family protection.

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 tocover 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 onlyabout 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 operatin 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.”

Survey Methodology

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.

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