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How to be a smarter life insurance shopper

Do you have a life insurance policy? If so, you’re ahead of the game.

According to LIMRA, a trade group for the financial services industry, only 44 percent of Americans have individual life insurance coverage; 30 percent have no coverage at all.

So why are consumers dropping their life insurance policies or not buying coverage in the first place? Deloitte Consulting surveyed more than 2,000 Americans, both policyholders and non-policyholders, to gauge their thoughts on life insurance coverage.

life_insurance-shoppingWhile the survey’s primary goal is to help marketers sell life insurance, the results offer insights that consumers can tap to be smarter about buying life insurance.

Why are fewer people buying life insurance?

In the study, non-buyers cited a range of reasons for not getting life insurance.

1. I don't need it.

Half of the people surveyed claimed that they didn’t need life insurance because they don’t have children, or that their dependents would be able to support themselves. However, that’s not necessarily a good reason to not pursue coverage, says Bob O’Brien, vice president of Maine insurance agency Noyes Hall & Allen.

“Even people who live alone and have no heirs will leave an estate that will incur final expenses,” O’Brien says. “These may include medical, funeral, cremation or burial. Life insurance provides the estate with funds to pay these expenses, reducing your burden on those left behind.”

2. I think it's too expensive.

Just over half of the people surveyed said they'd like to buy life insurance but thought it was too expensive.

Deb Newman, chairwoman of the LIFE Foundation, a nonprofit resource for insurance consumers, believes most people don’t have an accurate sense of what life insurance costs. “Life insurance costs much less today than it used to,” she says. “There’s a lack of understanding around this, and we need to do a better job educating consumers.”

In fact, a study co-sponsored by the LIFE Foundation and LIMRA found that less than one-fifth of consumers correctly estimated the cost of a life insurance policy. Survey respondents were asked to estimate the annual cost of a 20-year, $250,000 term life policy for a healthy 30-year-old. The actual cost is roughly $150, but Americans pegged the cost at $400.

3. I don't trust the industry.

One-fourth of those surveyed cited another motive for not purchasing a policy: They don't trust insurance agents or companies.

Newman says it’s common for consumers to be cautious about the prospect of being talked into buying insurance policies that they don’t want or need. The best remedy, she says, is educating yourself.

She recommends visiting lifehappens.org and other online resources to analyze your life insurance needs before speaking with a life insurance company or agent.

“Tell an agent, ‘I’ve done some work on my own, and this is what I believe to be my need,’” Newman says.

Typically, the agent’s analysis will be closely aligned with your own. If the cost winds up being much higher than your own estimate, you may want to speak to several other agents to see whether their quotes match up or to find out the reason for the disparity.

4. I don't have the opportunity.

A final reason given for not buying life insurance is a lack of opportunity. Consumers who don’t gain life insurance benefits through their employers rarely receive offers to buy policies independently, and they're often confused about the process of purchasing it on their own. Two-thirds of the people surveyed said they’d had no offers to purchase insurance, and one-fourth said the application and purchasing process was too complicated.

Newman thinks insurance agents need to do a better job of reaching out to consumers as their life circumstances change.

“I’ve been in the insurance business for 33 years, and when I started, you could call someone to talk about insurance when they’d just gotten married or had a baby,” she says. “No one is doing that anymore.”

She suspects one factor may be that more people are living together in committed relationships without getting married, and neither agents nor consumers are bringing up the need for life insurance at this point.

Newman says that consumers should take more responsibility, no matter the legal nature of their relationship. “They should look at their circumstances and say, ‘Do I have responsibility to make sure this person will be OK if something happened to me?’”

The downside of group coverage

Often, the decision to purchase life insurance is tied to a new job’s benefits package. Forty-four percent of those surveyed had purchased coverage through an employer.

While group coverage can be a practical option in some cases, it does not always provide coverage if you leave a job. Twenty-two percent of uninsured respondents had lost coverage after losing a job that offered the benefit.

Additionally, O’Brien says, “the amount of insurance is low. Group life insurance face amounts are usually a small multiple of your salary,” often equivalent to little more than one year’s pay, he says. “If you're like most people, your dependents would need much more money than this to replace your lost income.”

O’Brien recommends that consumers look into buying individual life insurance even if they’re eligible for group policies. In many cases, he says, younger people may pay less for individual policies, since they’d otherwise be lumped in with older co-workers.

More education

Many of the study’s findings point to a need for the insurance industry to do a better job of educating consumers about the role that life insurance should play in their financial planning.

In a notable example, 30 percent of consumers who hoped to buy life insurance in the future said they’d buy less than $50,000 worth of coverage.

Why so little? Newman says there’s a misconception that life insurance’s main purpose is to cover funeral expenses.

“They might only need $10,000 for that, so $50,000 should be plenty, in their minds,” she says. “Most people don’t think of life insurance as a way to protect the future income needs of their families.”

She recommends talking with insurance agents and financial advisers to determine the actual value of your income to your family.

“Your ability to earn an income is your most important asset, so it's much more important to insure your life value than to insure the things that you own,” she says. “Take personal financial responsibility to ensure that your family is protected.”

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