Solving the U.S. Life Insurance Crisis:Parents consider it extremely important to have life insurance, found the 2013 State Farm Life Insurance survey. But 95 million Americans have no life insurance coverage at all, according to LIMRA. What does this mean for your employees?
The lack of life insurance could mean financial ruin for a family. More than half of American adults surveyed said losing the family’s primary wage earner would have a “financial impact” within a year, while nearly half (47 percent) would feel the impact in only six months. And one-third said they would feel the impact within a month of the salary earner’s passing, according to LIMRA research. Younger people would feel the impact sooner than older respondents.
Underinsurance poses a serious problem for Americans as well. Most families use life insurance to replace a wage earner’s income if he or she should die prematurely. But most American families with life insurance do not have enough to replace a wage earner’s lifetime earnings. A 2013 survey by Nationwide Financial found that 98 percent of consumers who are married, partnered or have dependents are underinsured. They have, on average, $300,000 in life insurance coverage but lifetime earnings potential of $1.5 million. If they die prematurely, they would leave their families about $1.2 million short of replacing their income. Families who don’t have life insurance to replace a high percentage of a deceased wage earner’s income face the risk of a reduced standard of living.
The problem of underinsurance or lack of life insurance doesn’t exist in a financial vacuum. In a recent survey by the Society for Human Resource Management (SHRM) a combined 61 percent of human resource professionals rated their employees’ overall financial situation as no better than fair (50 percent fair, 10 percent poor and 1 percent very poor). As you might expect, employers with higher numbers of hourly workers were more likely to rate their employees’ financial situation as poor.
Impact on the Workplace
Financial insecurity spills over into the workplace. Thirty-seven percent of HR professionals surveyed by SHRM said that employees at their organization have missed work due to a financial emergency in the last year. Many studies have found that financial stress also leads to more health problems…which means more costs for employers.
Most Americans wouldn’t dream of leaving their other assets uninsured, such as their house or car. So why don’t people buy life insurance to cover their lifetime income potential, which has a greater value than the average house? People give various reasons, but often it boils down to lack of urgency and opportunity.
In the 2014 Insurance Barometer survey, 30 percent of consumers who lacked insurance said they hadn’t “gotten around to” buying it. Others cited cost. About 70 percent of consumers surveyed by LIMRA said required cost of living expenses prevent them from buying any or more life insurance. And 50 percent cite “additional living expenses,” such as Internet, cable and cell phone costs, as a barrier.
The Role of Employers
In many cases, however, consumers might just be confused. A new study calls 19 million Americans “stuck shoppers” of life insurance, because they believe life insurance is valuable and necessary, but they find shopping for it confusing and overwhelming.
The joint study, by insurance trade organization LIMRA and Maddock Douglas Research, lays the blame on insurers, saying their communications lack clarity and relevance for consumers. Information overload also plays a role, since consumers faced with too many choices frequently decide not to buy at all. Employer-sponsored plans make it easy for consumers to obtain the life insurance coverage they need by eliminating some of the guesswork.
Even if you offer life benefits on a contributory basis, your employees are likely to respond. In the Nationwide Financial survey, consumers said they were willing to pay an average of $99 per month to ensure their family could maintain its standard of living after the death of a salary earner. For that amount, a healthy 35-year-old could bridge the coverage gap. A healthy 35-year-old man could buy more than $2.3 million in term life coverage, while a 35-year-old woman could buy more than $2.6 million in coverage.
Advantages of Group Term Life
Group term life insurance plans offer many benefits over individual policies. Insurers will write employer-sponsored plans on a guaranteed issue basis. This means the insurer will issue at least a minimum amount of coverage to any employee who meets the group eligibility requirements (such as tenure or hours worked), regardless of their health. This allows employees whose poor health would prevent them from buying individual coverage to obtain life insurance. Guaranteed issue amounts vary with the size of the group—the larger the group, the larger the maximum guaranteed issue amount will be. Guaranteed issue amounts typically range from $10,000 for smaller groups to $75,000 or more for larger groups. Employees who meet the insurer’s underwriting standards can obtain higher coverage limits. Maximum limits vary with group size; members of larger groups may be able to buy as much as $500,000 in group term coverage.
Employers can also offer group term life on an entirely voluntary (employee-paid) basis. Insurers may set lower guaranteed issue amounts for voluntary plans to avoid “adverse selection.” This occurs when people who are more likely to file a claim buy a disproportionate percentage of policies. In a voluntary plan, you might find a guaranteed issue limit of $10,000, or perhaps as high as $100,000 for larger groups.
Employers can help their employees overcome the life insurance crisis by offering financial education. Employees who are better educated about financial matters appreciate the value of their benefits more, save more for retirement and have fewer financial stresses—which can affect productivity.