Here's what to know about buying life insurance

Fewer Americans are purchasing life insurance than in the past, suggesting that families may be at financial risk in the event of an unexpected death, experts said.

About half of consumers, 52%, had a life insurance policy in January 2023, down from 63% in 2011, according to a poll by Limra, an insurance industry trade group.

Data from the National Association of Insurance Commissioners, a group of state insurance regulators, shows a similar trend: By 2019, coverage had fallen to 59% of households from 69% in 1998.

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“It's quite clear to me that there's a very big gap here,” said Scott Shapiro, head of US insurance at KPMG. “There is a real protection gap where Americans are completely underinsured.”

The main purpose of life insurance is to provide financial security to loved ones in the event of the policyholder's death. At that point, your beneficiaries receive the death benefit (which is generally tax-free).

That makes it “kind of a funny product: It's something we buy and hope we never have to use,” said Matt Noll, a certified financial planner based in Moline, Illinois.

Many Americans fail to plan ahead for their deaths, neglecting to draft wills, establish powers of attorney, or designate beneficiaries of financial accounts.

Overall, the percentage of households with life insurance has declined “steadily” since the early 1970s, according to the NAIC.

There are likely many reasons for this decline.

First, younger generations are putting off major financial and life accomplishments such as getting married, buying a home, and having children compared to older generations. Each is generally a major incentive to buy life insurance, experts said.

Rising costs of homeownership and child care coupled with higher debt burdens (for student loans, for example) may mean that younger families are less willing or able to pay their monthly insurance premiums, said Noll, a senior financial planner at the Planning Center.

In general, insurance costs themselves are rising for consumers, Shapiro said.

Additionally, life insurance is often not easy or quick to purchase due to factors such as medical underwriting tests, Shapiro said.

“It's a complicated deal,” he said.

There are more benign factors, too: For example, fewer consumers have sought the tax advantages of some life policies as other tax-advantaged savings options such as 401(k) accounts and 529 plans have emerged, Noll said.

Still, even with fewer people buying life insurance, “I think there's a need for it.”

Life insurance isn't necessarily right for everyone. Here are some key considerations.

Consumers should consider their financial situation and the standard of living they want to maintain for survivors (such as dependents or a spouse), according to the Illinois Department of Insurance.

In the absence of the policyholder's income, there may be financial inability to pay for daily household expenses, or debts and expensive items such as tuition fees, for example.

“Who will be responsible for your funeral costs and final medical bills? Will your family have to move? Will there be enough funds to cover future or ongoing expenses such as daycare, mortgage payments, or college?” The administration said in its consumer guide.

Single people without children may also have financial obligations they want to secure, the ministry said. These may include funeral expenses, medical bills, debts such as credit cards or student loans, and financial support for elderly parents, IDOI said.

There are two main types of life insurance: term and permanent.

Term insurance is usually best for most consumers, according to financial advisors.

These policies last for a specific period, perhaps 10, 20, or 30 years. They generally carry fixed monthly premiums.

The length of one's financial commitment is a good guide to which term one should choose, Shapiro said.

If the policyholder's spouse is 35 and the policyholder seeks a financial hedge until his or her spouse retires—perhaps at age 65—the buyer might choose a 30-year term, for example. Ensuring there is enough money for young children to go to college could mean having a policy that lasts about 20 years.

Permanent life insurance, such as a whole or universal life policy, is meant to last your entire life.

It may make sense for consumers to pay for a whole life insurance policy if they want to leave a financial legacy to charity, or reasonably expect to develop a medical condition that could make it difficult to obtain insurance later.

Permanent insurance is usually more expensive and complex than a term policy, advisors said. For example, an account often carries an interest bearing plus an insurance component.

Policyholders can build cash value over time depending on factors such as dividends or investment returns. The cash value can have various uses: to pay insurance premiums, as collateral for a loan, or as cash in case the buyer surrenders his or her policy in the future.

However, there are a lot of subtleties and consumers should avoid buying something they don't understand, consultants say.

Every buyer is different when it comes to hedging financial risks, Knoll said.

Some consumers may want a policy that would pay survivors the equivalent of all future annual income for years into the future, he said. Others may want to replace their debt obligations or just their children's college education, or a combination of these and other costs, Knoll added.

Consumers may obtain life insurance coverage through their place of employment. If so, evaluate whether additional funds are needed.

Here's an example of what a family might need, according to Jim Bradley, CFP, founder of Maine-based Penobscot Financial Advisors: “Lucy and Ricky plan to put their two children through college at a cost of $400,000 and buy a house for $200,000,” he wrote. He raised so much to achieve these goals, they should consider covering the shortfall, in this case $600,000, with life insurance.”