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Consumers clueless about life insurance value

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Just about everyone who is part of some type of family unit is not, by life insurance industry standards, adequately protected by their current level of life insurance.

In fact, on average, consumers are about $1.2 million short, according to Nationwide Financial.

Given that life insurance has been sold for decades, this is a sobering discovery. But it does leave open opportunity for brokers, agents and advisors selling life insurance policies.

See also: Helping your clients understand their life value

The life insurance gap was identified in a new poll of 1,100 people between the ages of 24 and 66 by the Columbus, Ohio-based insurer. All of the people polled were married or had a life partner; some had dependents and none were retired. Household incomes were $24,000 and up.

Nationwide defines full life insurance protection as having enough coverage to replace one’s income upon death. By this measure, only 2 percent of respondents were fully insured.

“The average consumer surveyed will earn roughly $1.5 million before they retire and holds about $300,000 in life insurance coverage, leaving them about $1.2 million short of replacing their income with life insurance,” Nationwide said in a release. 

That’s a disaster waiting to happen, said Eric Henderson, senior vice president of life insurance and annuities for Nationwide Financial. 

“Many Americans have the false perception that they have an adequate life insurance plan in place,” Henderson said. “When they actually do the math, the true picture may become clearer, and hopefully motivate action.”

The survey reported that just 29 percent of respondents believe they can afford enough life insurance to replace their household income. However, most consumers think it costs a lot more to buy full insurance coverage that it actually does, Nationwide said.

Citing research by the Life Insurance Marketing and Research Association, Nationwide said “consumers generally overestimate the cost of life insurance by nearly three times.”

At the same time, respondents showed a serious lack of understanding about the value of their current life insurance. Two-thirds of respondents said they thought they had enough insurance to replace the earnings generated for the rest of their working days. Fifty-five percent said they were pretty sure their coverage would replace their spouse or partner’s income.

“Despite this relative confidence, when asked how long their family could maintain its standard of living if a breadwinner died, 62 percent either don’t know, or think they could do so for just four years or less,” Nationwide said. Some 36 percent insisted their family could adequately fund the retirement of the surviving spouse or partner.

Where do people get their ideas about the value of their insurance policies? Only 35 percent said they got help from an insurance agent or financial advisor to determine how much life insurance to buy. Another 20 percent admitted they just pulled a number out of thin air.

Clearly, Nationwide believes those seek professional guidance will leave their families far better situated than those who wing it on insurance coverage. Another finding of the survey showed just how close most of the respondents are to having sufficient coverage.

They were asked how much they would be willing to spend a month “to ensure their family can maintain its standard of living indefinitely following the death of a bread winner.”

Surprisingly, the average answer — $99 — would do the trick.

For this amount, a healthy 35-year-old man can purchase a 20-year term life policy worth more than $2.3 million. A healthy 35-year-old woman can purchase more than $2.6 million in coverage. This is more than is needed to wipe out the average life insurance income replacement gap.

Thus, it appears up to the insurance industry to do a better job of explaining to consumers the realities of life insurance coverage.

“Advisors and insurance agents may be able to motivate clients by helping them understand the implications of their income replacement gap,” Henderson said. “We know that consumers don’t respond well to scare tactics, however, they may be relieved to learn that the solution is not as scary as they may expect. Even if they don’t feel compelled to buy enough life insurance to replace all of their income, most consumers can afford enough to put a significant dent in their income replacement gap. That’s at least a step in the right direction.”

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