Free Life Insurance: Who Benefits And How Many?

Life insurance is often offered as part of a benefits package at work, and many people opt into it during open enrollment. While it may be tempting to gloss over the life insurance portion of open enrollment, it is important to make sure you have named beneficiaries on the account. Failing to do so could result in your loved ones having to go through a lengthy and expensive legal process to claim the payout. It is also important to remember that your primary and secondary beneficiaries should not be minors, as they cannot legally take possession of the money. Although it may seem like a good idea to get extra insurance through your workplace, it is often cheaper to get additional insurance on your own if you are healthy.

44% of American households would face financial difficulties within six months of losing their primary earner

Life insurance is an important financial planning tool that provides financial protection to the families of the insured in case of their untimely demise. However, despite its importance, a significant number of Americans do not have adequate coverage.

According to a 2024 study by LIMRA and Life Happens, 44% of American households would face significant financial difficulties within six months of losing their primary wage earner. This statistic highlights the financial vulnerability of a large number of American families.

The study also revealed that 28% of households would reach this point in one month or less, underscoring the urgency of the situation. The high percentage of families at risk of financial difficulties is concerning, especially considering that life insurance is meant to provide a safety net in such situations.

One of the main reasons for this gap in financial security is the perceived high cost of life insurance. Over half of Americans (52%) cited the expense as the reason for not having life insurance. However, this perception is often due to misinformation, as 82% of Americans overestimate the cost of a policy, with the largest majority guessing the cost to be three times as high as it actually is.

The gender gap in life insurance ownership further exacerbates the issue. The LIMRA and Life Happens study found that women are consistently 11 percentage points below men in life insurance ownership rates. Additionally, life insurance ownership among women has been on a decline, with 36% citing unexpected job loss as the reason for losing their coverage in 2020.

The racial gap in life insurance ownership is also notable, with only 45% of Hispanic Americans having life insurance, the lowest among all racial and ethnic groups. Black and White Americans have higher ownership rates, averaging nearly 10 percentage points higher than Hispanic Americans.

The generational gap in life insurance ownership is another factor contributing to the financial vulnerability of American households. The study found that Baby Boomers have the highest rate of life insurance ownership, while Gen Z, the youngest generation in the study, has the lowest ownership rate despite expressing a growing interest in obtaining coverage.

The financial concerns of millennials, the generation with the second-lowest ownership rate, are also notable. The study revealed that millennials currently express the highest level of concern over financial matters, a shift from previous years when Gen X held this distinction.

In conclusion, while life insurance is meant to provide financial security to families, the gap in ownership and inadequate coverage leaves many American households vulnerable to financial difficulties in the event of the loss of their primary wage earner. Addressing the misconceptions about cost, as well as the gender, racial, and generational gaps in life insurance ownership, is crucial to ensuring the financial protection of families across the nation.

82% of Americans overestimate the cost of a life insurance policy

82% of Americans Overestimate the Cost of Life Insurance

A recent survey by Forbes Advisor revealed that 82% of Americans over the age of 25 believe that the cost of a term life insurance policy is at least three times the actual amount. Term life insurance, which provides a payout to your beneficiary after your death, can cost less than $20 a month. The cost of life insurance depends on several factors, including the type of policy, age, gender, and health information.

Misconceptions About Life Insurance

The Forbes Advisor survey also highlighted some common misconceptions about life insurance. For example, only half of the respondents thought that a life insurance payout could be used for funeral expenses, and just 49% thought it could be used to pay off a mortgage. Additionally, many respondents were unsure about who could be named as a beneficiary, with only 32% thinking it could be a friend and 18% knowing it could be a charity.

Overestimating the Cost

The majority of Americans over the age of 25 (82%) believe that a typical term life insurance policy is more expensive than it actually is. Only 3% correctly guessed that it costs about $20 per month for a healthy 40-year-old buyer with a $500,000 10-year term policy.

Uncertainty About Covered Causes of Death

Nearly half (49%) of survey respondents were unsure or did not believe that life insurance policies cover death from illnesses, including COVID-19. In reality, almost all types of life insurance cover death from any cause, with the exception of suicide within the first two years of the policy.

Confusion About Beneficiaries

A life insurance beneficiary can be anyone from a relative to a charity of your choice, but many respondents were unsure. Only 56% knew that a parent could be listed, 53% for a sibling, 18% for a charity, and 12% for a college. Interestingly, 12% thought that a pet could be listed as a beneficiary, which is not true.

Misunderstanding of Factors Affecting Premiums

Life insurance quotes are influenced by various factors, such as the buyer's age, gender, health, and driving record. However, 42% of respondents mistakenly believed that household income affects life insurance quotes, and 40% thought that the number of children they have would also be a factor.

Confusion Between Term and Whole Life Insurance

There is also confusion about the cost difference between term and whole life insurance. Over a quarter of respondents (28%) thought that whole life insurance is cheaper than term life insurance, while 24% believed they cost the same, and 22% were unsure. In fact, term life insurance is the more affordable option, with fixed premiums for a specific number of years, while whole life insurance has fixed premiums for the duration of the policy and builds cash value.

Lack of Understanding of Term Life Insurance Basics

Additionally, 36% of Americans over the age of 25 believe that they will receive a refund of premiums paid on a term life insurance policy if they are still alive when the policy ends. This lack of understanding of how life insurance works could lead to unpleasant surprises, as there is generally no payout if the insured person outlives the coverage period.

30% of Americans who have life insurance are only insured through a group

Life insurance is a valuable financial planning tool that provides financial protection to the loved ones of the insured. However, about 30% of Americans who have life insurance are only insured through a group. This means that they rely solely on group life insurance, which is typically offered by employers as a workplace perk. While this can provide some coverage, it is important to understand its limitations.

Group life insurance coverage is usually limited to a predetermined amount set by the employer, such as one year's salary. Additionally, this type of insurance is often only active while the insured remains employed by the company. As a result, individuals relying solely on group life insurance may find themselves underinsured or at risk of losing their policy if they leave their job.

To ensure adequate coverage, it is recommended to purchase an individual life insurance policy with a death benefit and length of coverage that aligns with one's personal needs. This can provide more comprehensive protection and peace of mind. By seeking individual coverage, individuals can tailor their policy to their specific circumstances, ensuring their loved ones receive the financial support they need in the event of their death.

Furthermore, it is worth noting that the decision to purchase life insurance is influenced by various factors, including age, income level, employment status, gender, and marital status. Among these factors, age is the biggest determinant, with older adults having the highest enrolment rates. This is particularly true for those in the Baby Boomer generation, who are increasingly relying on retirement savings and other sources of post-career income.

In conclusion, while group life insurance can provide some coverage, it is important to recognize its limitations. By supplementing it with an individual policy, individuals can ensure they have sufficient protection that meets their unique needs and provides financial security for their loved ones.

20% of Americans with life insurance believe they do not have enough coverage

While it is unclear how many people are getting free life insurance, it is evident that a significant number of Americans feel they do not have adequate life insurance coverage. According to a study by The Zebra, 20% of Americans with life insurance believe they do not have enough coverage. This perception of insufficient coverage is not limited to a specific group of people and is prevalent across various demographics.

The perception of inadequate coverage exists among different age groups, with Gen Z and millennials expressing the highest levels of concern. Nearly half of Gen Z (49%) and millennials (47%) believe they do not have enough life insurance, indicating a significant need gap among younger generations. This trend is also observed in the Life Insurance Barometer study by LIMRA and Life Happens, which found that 14% of Gen X and 11% of baby boomers feel they have insufficient coverage.

Gender plays a role in the perception of coverage, with women being more likely than men to report not having enough life insurance. In the LIMRA and Life Happens study, 11% of women reported having some coverage but not enough, compared to 7% of men. This disparity may be due to the knowledge gap, as the study found that women are less likely than men to feel knowledgeable about life insurance.

Income levels also impact the perception of coverage. The study revealed that individuals with lower incomes are more likely to feel they do not have enough life insurance. Among those with a household income below $50,000, 56% reported not having enough coverage, while this number decreased to 39% for those with incomes between $50,000 and $149,000 and further dropped to 28% for those earning over $150,000.

The perception of insufficient life insurance coverage has led to a growing interest in financial planning among Americans. They are increasingly turning to sources like YouTube, Instagram, TikTok, and Facebook for financial information, especially among younger generations. This shift in information-seeking behavior presents an opportunity for the insurance industry to educate consumers about their options and address misconceptions about cost and coverage.

52% of Americans think life insurance is too expensive

According to a 2023 study by LIMRA and Life Happens, 52% of Americans don't have life insurance because they believe it is too expensive. This perception is more common among younger adults, who may not have a spouse or children and therefore feel they don't need life insurance yet. However, this is a misconception, as life insurance has never been more accessible or affordable. For example, a healthy 40-year-old man can expect to pay, on average, less than $30 per month for a $500,000 20-year term policy.

This perception of life insurance being too expensive is also reflected in the fact that 82% of Americans overestimate the cost of a policy, with the largest majority incorrectly guessing the cost to be three times as high. This misconception is one of the main barriers to buying life insurance, along with other financial priorities and uncertainty about the necessary level of coverage. Addressing these misconceptions and educating consumers about the value and potential affordability of life insurance is key to closing the gap between those who have life insurance and those who still need it.

Furthermore, this perception of life insurance being expensive varies across different demographic groups. For example, there is a consistent gender gap in life insurance ownership, with women being less likely than men to have adequate coverage. This is partly due to women feeling less knowledgeable about life insurance than men. Additionally, lower-income households are less likely to have the life insurance coverage they need, and there are also differences in ownership rates and perceptions of cost across racial and ethnic groups.

While the cost of life insurance is a concern for many Americans, it's important to note that the average cost of a $250,000, 20-year term life insurance policy for a healthy 30-year-old is $152 per year, which is much lower than what many people expect. Life insurance is an important financial planning tool, and understanding its true cost can help more people make informed decisions about protecting their loved ones.

Frequently asked questions