I get lots of press releases and most of them promptly find their way into the recylcing bin on my computer or the one on my office floor. On rare occasion, I find useful information worth telling you about and sometimes I find misinformation equally compelling to cover as well.

Below is my take on a recent press release from a major life insurance company. The release was entitled "COMING UP SHORT: NEW STUDY REVEALS WIDE CHASM BETWEEN LIFE INSURANCE COVERAGE AND COMMON FINANCIAL GOALS FOR MILLIONS OF AMERICANS" and contained some reasonable perspectives but also some erroneous statements and arguments. If you have life insurance coverage or are in the market for such coverage, you should be aware of the incorrect arguments make in this "study" because they will be used by life insurance agents and companies in their marketing of various life insurance programs and because you will hear similar misinformation in media articles written by clueless journalists who lack the necessary financial expertise to understand life insurance.

Below are excerpts from the press release followed by my comments:

"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. 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."
 
Ultimately, when you buy life insurance to protect a breadwinner's income, you should consider how many years worth of that person's income you're seeking to replace. I know from previous experience working as a personal financial counselor that a good portion of folks are underinsured so I don't quibble with this study's finding that the average family needs more life insurance protection.


"...43 percent report having no individual life insurance coverage on the non-breadwinner.  Including both group and individual coverage, non-breadwinners have a median of $50,000 in life insurance coverage."

This is a valid and worthwhile point I have made to families. Stay-at-home parents provide lots of valuable services to their families yet aren't paid for their efforts. Insuring a stay-at-home can make sense especially in those cases where the family would hire out for services in the event of the passing of the stay-at-home parent.  


"Over 80 percent of survey respondents believe that the breadwinner in their household is at least somewhat likely to keep their life insurance coverage for life.  But the study reveals that their self-reported statistics indicate otherwise.  Only about one-third of breadwinners have an individual permanent life insurance policy that will remain in place during retirement.  The remainder either has no coverage, term coverage or group coverage through work or another source.  Group policies are often term policies, which become very expensive or unavailable as people age. In addition, most employees lose group coverage when they leave their jobs.  As a result, the likely scenario is that many Americans will not have coverage in their retirement years."

Life insurance is rarely a permanent need. Life insurance is needed during the portion of your adult life when others are financially dependent upon your income. In order to retire, one must be financially secure enough to do so. Some folks achieve financial independence before actually retiring.


"The survey's findings challenged the conventional wisdom which counsels consumers to buy term and invest the rest.  About one quarter of respondents who bought only term insurance for their household breadwinner indicated they did so because they felt they would invest the difference.  However, only 40% of this group reported having actually saved or invested all of that money...In addition, studies indicate that retirement savings is inadequate.  The 2008 Employee Benefit Research Institute Retirement Confidence Study shows that one out of every two workers with incomes of $50,000 or more per year have less than $100,000 in savings and investments."

Cash value life insurance policies combine life insurance protection with a savings type account. Because cash value life insurance is so much more costly than term life insurance, my experience and observation has been that many folks, especially more moderate income earners, who buy cash value policies are the ones who don't have enough coverage - the very people highlighted in this study! You get the most life insurance bang for your buck buying term life insurance. To save and invest for retirement, do so in a retirement savings account which, unlike a cash value life insurance policy, provides up-front and ongoing tax benefits.


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Copyright Eric Tyson, 2008 - 2010 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.