Here’s what to know about buying life insurance

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

Data from the American Council of Life Insurers, or ACLI, a life insurance trade association, shows a similar downward 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 generally tax-free death benefit.

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.

Why life insurance purchases have ‘steadily’ fallen

For one, younger generations are deferring big financial and life milestones such as getting married, buying a home and having kids relative to older generations. Each of these events generally acts as a key trigger to buy life insurance, experts said.

Higher-costing 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 such as 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, such as 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.

When to buy life insurance

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Consumers should consider their financial situation and the standard of living they want to maintain for survivors, such as dependents or spouses, 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 such as 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, such as funeral expenses, medical bills, debts like credit cards or student loans, and financial support for elderly parents, the IDOI said.

What type of life insurance to buy

It’s absolutely clear to me there’s a very large gap here.

Scott Shapiro

U.S. insurance sector leader at KPMG

How much life insurance to get

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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 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.

Correction: Data from the American Council of Life Insurers showed that life insurance coverage had fallen from 69% to 59% between 1998 and 2019. A previous version of this article misstated the name of the group.

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