The Decline of Life Insurance Is a Mystery

Life insurance is losing its appeal in the United States. In 1965, Americans purchased 27 million policies, individually or through employers. In 2016, a population that was more than 50% larger still bought only 27 million policies. The share of Americans with life insurance has fallen to less than 60 percent, from 77% in 1989. Why this is happening remains a puzzle.

People buy life insurance for various reasons: to pass wealth along to future generations, to provide liquidity for mortgage payments, or to cover funeral expenses, to name a few. These motivations may become more or less important as the population shifts demographically.

Yet socioeconomic and demographic trends can’t explain the decline in life insurance, a recent analysis from the Federal Reserve Bank of Chicago has found: If various population groups had acted the same way in 2013 as they did in 1989, 78% of U.S. households would have had life insurance, not 60%.

Other evidence points in the same direction. The observed declines have been steeper for cash value life insurance, which includes a saving component, than they have been for term life, which does not. Another study looking specifically at cash value ownership found that neither changes in demographics nor in the tax law (which can affect the incentives to hold cash value policies) can explain the declines from 1992 to 2010.

The puzzle deepens when one examines life expectancy, which clearly should influence decisions about life insurance. Theoretically, the lower a person’s chance of dying over a given period, the less should be his or her desire for life insurance during that time. And over the past few decades, overall life expectancy has risen.

But this otherwise plausible explanation doesn’t work when you take a closer look and see that life expectancy has been rising rapidly only among higher earners. For lower earners, it has been stagnating or even declining. The top 40% of male earners who reached age 50 in 2010 could expect to live seven to eight years longer than those who reached that age in 1980. But there was little to no increase for the bottom 40% of male earners across those generations, a National Academies of Sciences panel that I co-chaired found.

If life insurance changes were being driven by life expectancy, we would expect ownership to fall less (or perhaps even rise) among lower earners and to fall more among higher earners. Instead, the opposite has happened.