Not everyone needs life insurance, despite what some salespeople may tell you. But too many people who do need those policies, namely parents of minor children, often go without.
The number of consumers going without any life insurance at all is on the rise. Thirty percent of U.S. households don't have coverage, compared with 22 percent six years ago, according to a recent survey by LIMRA, an industry-supported research group. Among those going without: 11 million families with children under age 18.
The number of American households with an individual policy purchased outside any workplace coverage — about four out of 10 — is at the lowest level in 50 years.
The reasons behind the dwindling interest are varied. A tight budget is one reason. Forty percent of those polled by LIMRA said they had priorities other than insurance for limited dollars, including saving for retirement or paying off debt. And insurance industry experts say it's hard for people to see the value of a product that won't kick in until they're dead.
This comes as some products are cheaper than ever. Take term life policies, which provide coverage for a specific period. The cost of these policies has dropped because people are living longer and insurers have been able to lower their administrative costs with technology.
In the early 1990s, a 40-year-old man in perfect health would pay an annual premium of $995 for a 20-year term policy with $500,000 of coverage, said Byron Udell, founder of AccuQuote, an online insurance broker. Today, the cost is $360 a year.
Some of those uninsured have made the right financial choice. But some of them could be putting their progeny at risk. The loss of a breadwinner takes a significant financial toll on survivors. And unless your family members have plenty of other assets to rely on, life insurance is an easy way to protect them.
Anyone who has a spouse, children or others who are dependent on their income needs life insurance.
Stay-at-home parents need coverage, although not as much as the breadwinner. The insurance would provide the family with income if the working parent needed to take time off the job after the main caregiver's death. And the insurance proceeds would help pay for day care when the parent returned to work.
Those with large estates also can use life insurance to pay estate taxes at death that could erode inheritances, said Brian Ashe, treasurer of the Life and Health Insurance Foundation for Education, an industry-supported education group. The federal estate tax temporarily expired this year, but is set to come back in 2011.
Salespeople often pitch insurance for young children. But unless children are supporting the family through modeling or some other career, they don't need insurance, said Greg Daugherty, executive editor of Consumer Reports.
Stick with term insurance, which can get the job you need done for less money than other types of policies, said Robert Hunter with the Consumer Federation of America.
Some employers offer group term insurance as a benefit option, which doesn't require a medical exam but is usually more expensive, Udell said. That's because workers enrolling often have health problems that would prevent them from buying an individual policy, and that pool pushes the price up for the rest. If you're healthy, you'll save money by buying an individual policy, Udell said.
How much insurance do you need?
For a quick calculation, experts recommend buying coverage worth five to 25 times annual income. But that's such a wide range that you might be better off trying to calculate coverage based on your individual circumstances.
"Try to project ahead," Daugherty said. Look at what income your family would miss after your death and future expenses, including the unpaid mortgage or college for the kids, he says. Consider other assets that your family can tap.
"If you have a lot of money in other kinds of investments, you might not need as much life insurance," Daugherty said. "On the other hand, you might want to protect them from having to use that money."
Maybe funds are low right now, and you can't afford as big a policy as you figure you'll need. You can still buy a smaller policy now and add more insurance later.
"A little insurance is better than no insurance," Daugherty says.