Falling life insurance costs are a boon to the underinsured

Many people like to avoid the subject of life insurance. Issues like personal mortality and confusion over what to buy along with high pressure sales pitches from hungry agents turn off potential buyers. It is estimated that millions of workers don’t have enough insurance to protect their families, while millions of others have none at all. Families with children are especially at risk: the loss of a principal wage-earner’s income can hobble the children’s abilities to afford the college of their choice and can jeopardize a spouse’s retirement.

The good news is that insurance costs have fallen dramatically in recent years, and coverage has become more available to high-risk buyers. Back in 1994, it cost a 40-year-old, non-smoker $995 a year to buy a preferred policy with a $500,000 death benefit. The standard policy cost $1,300, said the Insurance Information Institute. Today the same preferred policy costs $352—a $643 price decline in 12 years. The standard policy cost $641, less than half its cost in 1994.

Costs have dropped so much partly because people are living longer, which reduces the risk that insurers will have to pay benefits (because buyers often drop coverage later in life). Also, there are better treatments and more hopeful outcomes for many cancers and cardiovascular diseases. That has meant that those classified as higher risk due to personal health or family history have an easier time obtaining coverage, than they did in the past.

Most families need a lot of coverage from 10 to 20 times a worker’s salary. That makes whole life and other ‘permanent insurance’ unaffordable. The ideal solution is a large term policy that covers the period when death benefits are most needed. For instance, a family with a 5-year-old might buy a 20-year term policy, locking in a fixed price on insurance through the child’s undergraduate college education. Buyers should shop around: some companies offer better rates on specific risks than do others.