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November 21, 2010 at 07:00 PM
Life insurance ownership is at a 50-year low, with only 44 percent of U.S. households owning individual life insurance, according to a report released by LIMRA during Life Insurance Awareness Month. Furthermore, among households with children younger than 18, a segment with arguably the greatest need for life insurance, 11 million have no coverage at all.
This lack of coverage, especially for younger families, is alarming. It stands to reason that the birth of a child would be a primary time for young couples to start thinking about their financial future, but it’s important to consider that they may be in a difficult financial situation during that period. Not only do they have to think about protecting their new child’s future, they also have to figure out how to save for that child’s education and save for their own retirement.
It can be challenging for agents to work life insurance into this equation for younger clients, but discussing some of these goals together can actually be an effective way to explain the benefits of life insurance ownership. After all, it’s not mutually exclusive to fund a child’s financial future via life insurance and look for ways to potentially fund a college education.
Life insurance could be effective in a younger family’s overall financial strategy for several reasons. Life insurance will provide the financial reassurance they need, should the unexpected occur. The death benefit proceeds can be used to pay for final expenses, provide replacement income, or pay other financial obligations. Some policies also have the potential to build cash value. The policyholder can access cash value down the road (via policy loans), which can be used for various purposes, such as supplementing college funding.
The rise of the 529 plan
These days, when people discuss college savings, they generally focus on only one thing: 529 plans. Indeed, people are getting the message about 529 plans, as assets in these plans grew 1.3 percent between January and June 2010, and now total more than $135 billion. They are also gaining headlines by providing more options and reduced fees. Several 529 plan providers are introducing new products, added features, and reduced costs to entice investors seeking more conservative funding options.
All of this means it may be a good time to discuss college funding with young families, and how a life insurance policy can be part of that solution.
College funding has actually been an important consideration for many people who have purchased life insurance. According to the 2010 U.S. Life Ownership Study from LIMRA, college funding is among the top nine reasons for owning life insurance (10 percent) – although it ranked sixth on the list, behind reasons such as final expenses (78 percent) and income replacement (53 percent) – reinforcing the primary reason for owning life insurance with a death benefit. However, another LIMRA report – The Financial Protection of Generations X and Y – notes that, among younger families with children under 18, one of their most important financial goals is saving for their children’s education.
This seems to suggest a disconnect, or at the very least, a lack of understanding about some of the additional benefits that life insurance can provide. Although 529 plans are commanding the lion’s share of attention when it comes to college savings, a brief discussion about the options and flexibility of today’s life insurance policies can demonstrate their value as an alternative to 529.
