Life insurance can protect a family from financial problems after a key person dies, but too few U.S. families have the insurance they need. According to LIMRA there is a massive life insurance gap in this country, and financial professionals must work to bridge the gulf.
The gap is a result of misinformation among consumers, as well as clients’ desire to keep their liquid funds in higher-gaining investments than life insurance. Tellingly, the gap is not specific to certain part of the socioeconomic spectrum. This issue can affect anyone, and a failure to obtain adequate life insurance coverage can force people to abandon their way of life when tragedy strikes.
The scope of the problem
Underinsurance occurs when people incorrectly estimate the amount of life insurance they need. As a result, they purchase insufficient coverage for their economic situation, which can have serious consequences if they need to use the benefits from their insurance policies.
While some degree of underinsurance occurs regularly, this problem escalated in the years following the Great Recession. Consumers were already facing difficult fiscal times, and life insurance spending fell by the wayside, according to U.S. News and World Report.
Young people are often singled out as a high-risk group for underinsurance, and with good reason. A study released by LIMRA last year found that the majority of millennials would suffer financially if their home’s primary breadwinner passed away. While this issue might be more acute for lower-income portions of the population, it remains a serious concern for even high net worth consumers.
High net worth clients may not realize how much coverage they actually need, or might be unwilling to dedicate the funds needed for adequate life insurance coverage. These are the consumers that financial professionals should target to close the life insurance gap. In many cases they have the financial wherewithal to purchase coverage, but remain uninformed about how much coverage they need and how to get it.
Fixing the problem
Closing the life insurance gap for high net worth clients requires a two-pronged approach. Financial professionals must educate their clients on the value of adequate coverage before pushing them toward options that will provide enough insurance for worst-case scenarios. One excellent way to educate consumers is through a policy review.
A policy review allows financial professionals to walk through a consumer’s current investing and insurance strategy. Many people create a retirement plan and purchase life insurance early in life, but then fail to adjust their policy or strategy as time passes and their situation changes. This is the sort of lax attitude that leads to policy gaps in the long term.
If a financial professional identifies policy shortfalls in a client’s plan, they can suggest options to close the gap. Simply purchasing additional insurance may work for clients who have the available liquid assets, but many high net worth clients are reticent to devote money to life insurance when that cash could earn high returns in other assets. For these consumers, premium financing provides a compelling solution.
Premium financing fits into larger investment strategies
With premium financing, high net worth clients receive a loan that covers the upfront cost and premiums for a life insurance policy. The client only needs to pay interest on the loan out of pocket, and this allows individuals who do not have a large amount of liquid cash on hand to get the coverage that they need. If a financial professional discovers a serious insurance shortfall during a policy review, they should introduce the possibility of premium financing to help their clients remain secure.