American families are underinsured in life insurance to the tune of $20 trillion dollars, says a recent analysis of American finances. This protection gap would leave many of them struggling to pay the bills if something happened to the main breadwinner.
In its latest expertise publication, “The mortality protection gap in the U.S,” Swiss Re showed a declining rate of life insurance protection among families.
Since 2001, the protection gap – the difference between the resources needed and the resources available to maintain dependents’ living standards after the death of the primary breadwinner – has increased 10 percent. It presently stands at $20 trillion (135 percent of GDP). Life insurance coverage per family has declined 24 percent on average in the same period.
The demographic most impacted is the cohort of families whose primary breadwinner is between 35 and 44 years old. Inadequate mortality protection causes genuine financial hardship and many people are driven into poverty after the loss of a breadwinner.
“The U.S. protection gap has reached staggering dimensions,” Neil Sprackling, Swiss Re head of life and health for North America, said in a statement. “Life insurers have a unique value proposition in helping society close the gap and have a key role to play in helping to educate people on the benefits and affordability of life insurance.”
The past decade witnessed two economic downturns that eroded the finances of American families and heightened their need for protection in the event of the death of their primary breadwinner.
Families headed by a primary earner under 55 had an average estimated protection gap of $377, 900 in 2010. For every $100 of protection needed, these families had only $32 of net assets and life insurance in place, down from $46 in 2001.
“Mortality protection is lacking in many American families and the growing protection gap is a worrisome trend for individuals and society alike,” said Milka Kirova, Swiss Re senior economist and co-author of the study.
Life insurance can be a relatively low cost solution for many American families, yet demand is declining.
Since 2007, the volume of new individual life sales has declined at an average annual rate of five percent (inflation-adjusted) and an increasing number of people have allowed their existing policies to lapse.
At the same time, consumer awareness of underinsurance has improved, with half of families now recognizing that they are underinsured, although consumers across all demographic groups overestimate the actual cost of protection.
On average, a family would need 0.4 percent of household income to buy sufficient mortality protection through life insurance, according to the report.