In a recent SBLI Financial Awareness Survey, we looked to see why so many families choose to ignore the risks of not having a life insurance policy. As the survey showed, although the majority understood the importance of life insurance to financial security, only a minority made a plan and acted on it. Why?
Evidence To Act
Most people who own a home or an automobile are required to carry an insurance policy. This essentially forces people to responsibly protect themselves, their families and others. Owning a life insurance policy, on the other hand, is at the discretion of consumers, and many choose to ignore the risk — despite clear evidence that it is critically important.
A key element of families’ financial security is related to the loss of a breadwinner. In addition to the love parents offer their children, the parents’ income is essential to achieving a comfortable lifestyle and investing in their children’s futures. Independent of the emotional hardships families endure when a parent passes, the loss of income, “child-related services” and future savings can have a devastating effect on the quality of life of the children and the surviving spouse.
Given the magnitude of the impact of such an event, one could argue persuasively that every family’s financial security plan should include some form of insurance that protects the surviving family members’ quality of life.
In the survey, we tried to understand why so many families choose to ignore this risk, looking for answers to these questions:
» Do parents not see the benefit of maintaining the right levels of life insurance?
» Is it a matter of affordability?
» Is life insurance (and therefore, mortality) a subject that people would rather avoid discussing?
Key Survey Insights
With approximately 1,100 individuals completing this online survey in recent months, we’ve discovered some important themes.
Parents absolutely recognize the importance of family financial security and life insurance. Yet only a minority of respondents have a plan and have acted on it.
For those who have a plan and acted on it, it’s usually the result of a conversation with a friend or loved one or the result of a “personal experience.”
There are two primary reasons for parental inaction. 1) Procrastination: this topic is frequently ignored or avoided because of its linkage with mortality; 2) Affordability: 1 in 3 believes they cannot afford to fund this goal for their family. Yet, 84 percent said they would be comfortable spending between 0.5 percent and 5 percent of their annual household income on life insurance.
Procrastination Is Rampant
Survey respondents agree that protecting the family in the event of their or their spouse’s death is important, and 84 percent appear willing to fund a life insurance policy for this purpose. Forty-five percent agree it’s important to protect their family despite having done nothing about it, and another 45 percent believe their family is well-protected.
When asked how much of their annual income they would be willing to spend on life insurance, the most common response was 2.5 percent. Seventy percent of families said they are comfortable spending up to 2.5 percent of their annual income on coverage.
Yet procrastination is rampant when it comes to consumers planning to protect their families. A minority – 36 percent – have a plan and have acted on it.
What about the other 64 percent?
Forty-four percent of those procrastinators either never had the conversation with their spouse or admit they don’t really have a plan. The remaining 20 percent has a plan but have failed to act on it.
And it seems to take a long time for people to move from the thinking-about-it phase of buying life insurance to the do-something-about-it phase. Eighty percent of those who said they are thinking about purchasing life insurance have been doing so for more than a year. More than half of those who are thinking about it — 57 percent — have been considering it for three years or more.
Why does it take so long for people to take action on buying life insurance? Life insurance inherently raises the question of mortality, and 43 percent of respondents said they are uncomfortable thinking about it.
But a life event, provocative conversation or experience usually sends parents into action. Sixty percent of respondents said their reasons for developing a plan and acting on it were “a personal experience” and a “conversation with a friend or a loved one.”
For the 20 percent of respondents who have a plan but have failed to act, 1 in 3 believes they can’t afford life insurance. Nearly half (41 percent) are “not really sure” why they have failed to act or don’t know where to go to act on their plan.
Generally, respondents were complacently confident their family would be financially protected if something were to happen to them or their spouse. But unfortunately, this belief in their “readiness” appears to be unsubstantiated; only 1 in 5 has actually “run the numbers.”
Parents are blessed with one essential asset to cope with challenges of parenting: The impulse to love and protect their children is hardwired. Studies show that the act of caring for children activates a “parenting network” in the brain. This is equally true no matter whether we are talking about a mom or a dad or biological or adoptive parents. So it’s no surprise that parents can give their children just what they need — love and a feeling of safety — without an operator’s manual.
The pivotal word in the previous sentence is “can.” Just because a parent can provide their children with love and safety does not mean they will always succeed. Several environmental and biological factors can get in the way.
Rearing a child is an expensive proposition. The need to cover a child’s related expenses — which the U.S. Department of Agriculture estimates run between $212,300 and $454,700 — places particular funding pressures on parents. Parents are generally uncomfortable thinking about factors that could cause chaos in their family’s life.
Two out of 10 parents have failed to act on a plan to protect their families, our survey revealed. Although 82 percent of parents believe their loved ones would be financially protected if something were to happen to them or their spouse, only 22 percent have done those calculations.
Such reservations are not surprising, since just the thought of a chaos-causing event is highly unpleasant and therefore will naturally be avoided. For most parents, the thought of their own mortality and the mortality of their significant others is virtually unthinkable. Needless to say, few couples relish a conversation about the unthinkable.
Within a parent’s psyche, a neurological tug of war plays out: a hardwired instinct to protect the family from chaos pulling against a powerful resistance to thinking about mortality. This “hijacking” of important parenting instincts, ones that foster love and safety for their children, results in too many families placing their children at needless risk.
For parents with enough discretionary savings, there is only one sure way to overcome this hijacking. At a minimum, for every child born, a life insurance policy should be purchased with a coverage amount that funds a child through college. Moreover, when a home is purchased, more coverage should be added equal to the mortgage debt.
By recognizing their discomfort with the subject matter, partners can more easily overcome their resistance and do the right thing for their family.
David Ehrenthal is senior vice president at SBLI. Dave may be contacted at [email protected]