The decline of life insurance

Life insurance is losing its appeal in the U.S. In 1965, Americans purchased 27 million policies, individually or through employers. In 2016, a population that was more than 50 percent larger still bought only 27 million policies. The share of Americans with life insurance has fallen to less than 60 percent, from 77 percent in 1989. Why this is happening remains a puzzle.

That is from Peter Orszag at Bloomberg View.


The catchall trends of the "declining middle class" and "declining marriage rate" both offer explanations.

Congratulations, you are first to win the "didn't read the linked article (or the linked paper with in the linked article, only the headline" award.

The article doesn't mention declining marriage rate as a factor.

Well the linked article isn't very well reasoned. People without kids don't have the usual motivation to be guilted into purchasing it, and the people who tend to have a lot of kids and ditch them go out of their way to avoid paying for them.

What is amazing is that anybody still buys it, most of the sales seem to be forced on people by corporate HR departments trying to increase their own budget. The boards should put a stop to it. If you are insistent you can opt out and get them to stop charging you for taxes on the worthless policies. But it does explain the high amounts if they are 1x base pay and people don't opt out.

Insurance companies also aren't very responsible they tend to buy a lot of mortgage backed securities such as those leading to the 2008 recession.

Employer benefit does not count as "buying insurance", even the standard 2x to 5x added over the standard $50k. And that pool is about the lowest risk pool. All are basically healthy, and when not, the policy ends most likely before death, as employment ends before death. Extending the insurance in COBRA or retirement is very expensive.

More likely increased wealth and social safety net

The data contradicts the increased wealth. The Median household wealth declined significantly over the period and debt increased. Median household increased just slightly.

Did you adjust for household size?

"In 1989, 76 percent of Americans with a high school diploma owned any kind of life insurance. By 2013, that share had declined to 55 percent. For those with a college degree, ownership fell only to 73 percent, from 88 percent. ...Perhaps people in low-income households can no longer afford policies, or they don’t consider it as necessary as they once did to protect against financial risk to their families."

Duh. There has been a steep decline in the marriage rates among lower income, less educated people:

No marriage or family, no real need for life insurance.

Mea culpa. The 2nd study does control for marriage rates.

"Demand for permanent insurance declined in each survey year between 1992 and 2010 independent of changes in household characteristics or cohort effects. ...The primary driver of reduced demand attributable to household characteristics appears to be a decline in ownership among younger age cohorts."

"Permanent" insurance consists of term insurance plus an investment program where the return on the investments pays the premium. You can just buy term and invest the difference (BTID), and over the period studied the stock market went up hugely, making self-directed investing look very attractive. (I do BTID myself.) So people with kids and/or dependent spouses are buying term, and people with no kids or dependent spouses don't need insurance. Mystery solved.

Call it the invention of index funds. Anything but term life insurance is a stupid purchase today.

Life insurance as a benefit has been cut for low income workers, with the income threshold rising faster than median age.

A factory employed all workers and provided a $50k policy to all. Then jobs were outsource to contractors than provide no benefits. Then FT workers with benefits were made PT with no free benefits. Then benefits became a menu with fixed total so you drop life insurance to pay for vision and dental for the family. (With zero dependents I dropped the minimum insurance as soon as it wasn't "free".)

The reduction in life insurance coverage represents the erosion of the welfare system a la Bismark. Ie, employers create the social welfare state that is comprehensive to prevent voters demanding a government welfare system.

With many more households having two income earners and a trend to smaller family sizes, isn't there much less of a need for life insurance to support the spouse and kids in the event of an income earners' death?

Wouldn't it be mostly due to the combination of more ability of women to earn enough to support a family and a better safety net.

This is my guess as well. Two-income households provide redundant income sources which reduces exposure to the risk of a sole breadwinner dying and leaving children without support. Also, after the children are grown up, there's very little reason to have a life insurance policy at all. If the surviving spouse is below retirement age and has a means to earn their own income, then they probably would prefer to work rather than to just sit at home alone anyhow.

Two income households depend upon both incomes as public school make housing a positional good according to a little book I read by Elizabeth Warren.

While she has a point, that isn't true of each and every two-income household. I suspect that many two-income households that rely on two incomes to buy "positional" housing do buy life insurance.

Regardless, a reduction in income is much better than no income at all. A windowed spouse that has a job is going to have some buffer time to sell the house and move if necessary. The wife and kids will not be destitute. How much are you going to spend to protect your wife and kids from poverty and destitution, vs. from not going to the best high school in your city?

Because it seems unreasonable to pay for life insurance via credit card. Reminds me of a quote.

"I hope that when I die, people say about me, 'Boy, that guy sure owed me a lot of money.'"
Jack Handey

Cash value / whole life insurance used to be a popular investment vehicle. It has been exposed as overpriced and a bad investment.

This is the key. You had to send a check off in the mail to get a mutual fund, but an insurance agent was right there knocking on your door.

Totally agree with WC Varones. Life Insurance is a bad investment.

People are becoming more knowledgeable about investing, and apart from crashes in 2000 (dot com bubble) and 2008 (mortgage bubble), stock markets have done very well. Buying stocks or mutual funds is not the mystery or exclusive activity it once was.

We live in an age of incredible technological growth, and technology mutual funds have done very well, except possibly for those people that bought at a spike just before a decline. Even allowing for that, someone who bought into many of the technology mutual funds at the top of the 1999/2000 spike and hung on would by now be showing a profit.

Term life is not a bad product. Of course, I hope my buying it turns out to be a bad decision in hindsight (unless of course it's a bad decision because of the incentives I created for my wife ;)

The article points out that term life insurance is still selling and that it's whole-life that's suffered the bulk of the decline.

"Life insurance - a bet you make with the insurance company that you hope you lose."

That's not even a strange conclusion then. In fact, it's one of the most promising things I've heard about people's financial literacy improving.

Did whole life get so exposed? Maybe it was products sold on fat commissions that were a bad investment.

Does anyone sell whole life of the internet?

Yep. Whole life is a scam, term life is a gamble.

More people are either too poor to buy any life insurance, or rich enough that their families will be OK if they die and so they can invest the premiums. Neither group will buy term life insurance.

I have term life insurance, but I live in a single-earner family with limited savings and high enough income to afford the premiums. Not too many people I know are in my boat.

Well, the decline of cash value products is no surprise. They were plagued with hidden fees and rate of return risk/scams. The growth of 401ks allowed people to seperate their end of life cash concern from their retirement savings plans. I’d also like to see this controlled for changes in employer group plans. I do wonder if the failure of health insurance will lead to an uptick of life insurance as a sort of end of life stop loss on medical costs.

In 1980, who's most at risk when someone dies, and by how much?

In 2010, is the answer the same?

It's not. Fewer children. More workers in the household. No need to leverage insurance for retirement savings.

My wife and I have no kids and each has our own job. We have life insurance, but only so much as to finish paying off the house, so that guarantee is lifted. We would fully expect the surviving spouse to continue working, earning, and supporting themself. Gone are the days where the breadwinner dies and the family can't support themselves somehow. Not just need to change things to make things work, but just plain cannot. Sure, if you're a superstar earner and you can't realistically expect the rest of your family to follow suit, then yes, more life insurance makes sense. If you're at the low end of earners? No, not at all.

Seriously, does this feel like a puzzle?


Table 4 of the attached document supports this.

Maybe, but one reason for having term life insurance is to pay for your kids' college, which isn't getting cheaper. You're certainly right about fewer kids and women working more. I'd like to think that people wising up about life insurance other than term insurance as mentioned above plays a role, too. But maybe it isn't so much wising up as just not saving as much, since life insurance other than term is a (bad) method of saving.

College is partly priced on ability to pay, meaning it is cheaper the less money you have (and more expensive the more money you have).

It appears as if more than anticipated young people survived mass shootings and are living (on actuarial average) seven to eight more years ergo life insurance isn't as desirable. I also attribute the decline to the growing demographic with no children, living in their parents' basements that greatly enjoy eating Tide pods.

Spoiler: most who ate tide pods were the elderly with dementia.

But yeah snowflakes and stuff!

Bless your heart.

eating Tide pods

I am intrigued but I don't really want to know.

It’s irresponsible for most people with kids to not have term life insurance (on both parents). But we have been doing our best to discourage that sense of responsibility for quite some time now. It’s not surprising it has had an effect. It would be interesting to plot the decline of life insurance vs any number of social pathologies and disfunctions. See Charles Murray for a potential list. I suspect the correlation is pretty high.

If you look at the underlying data, households with children have dropped by 10% over the period. So this probably explains the bulk of the change.

Have children (%) 1989: 50.65 2013: 45.79

This, and the (well-deserved) decline of whole life policies are both likely factors, IMO.

It may also be that plain term insurance is more of a commodity, and is harder to doll up with worthless features, so there's lots of competition and not much room for sales commissions. Hence there is less incentive to sell it.

When my Term Life ( to cover children upto the period of settling down and earning their livelihoods) finished recently , I felt like I won the Lottery , though it was a negative amount over the years. Where else can you feel happy losing ?

I paid extra for these airbags in my car, and I've never used the damned things once.

Add annuities to the mix. Why aren't people with families who are 40 years old buying life insurance that pays off if they die at 60 or younger and, in a bundle, an annuity that starts throwing off monthly payments when they turn 70? The insurance company wouldn't mind selling both products together, as they have to some extent offsetting aggregate longevity risk contributions and individual-specific asymmetric information.

I think the reason is that insurance companies have been exposed as credit-un-worthy scam artists. A lot of smart people buy the absolute minimum amount of insurance that they have to for regulatory reasons, to increase customer comfort, and to cover truly catastrophic events.

Quite obviously: Americans born since 1989 have come to believe the soteriological tidings spewed ad nauseam by our Tech Sector and by our corrupt and corrupting Media Establishment, viz., they will all live forever.

Because I'm near, dammit! Isn't this obvious, yet?

You've been telling me this for decades, when the hell are you going to get here?

Oh, pipe down, Ray. I'll be here in 2058 - just 13 years after your prediction. Keep downing those supplements (I personally recommend NR or NMN at the current 2018 technological level) and you'll be fine. Sheesh, such a worrier.

That Peter Orzag dumps this "puzzle" on his readers without any hint of insight of the pretty obvious factors contributing to it (that commenters here and at the original article size) suggests that the Obama OMB was run by incompetents. Remarkably, Orzag's Wikipedia page suggests he fathered a child out of wedlock just after being hired by Obama, then married a different person one year later. In other words, a sanctimonious limousine liberal who likes to be thought of as a number cruncher and lover of humanity yet appears mystified by relatively simple business and personal responsibility issues.
What a jerk.

Maybe he should have hooked up with Stormy Daniels instead.

Hey msgkings, did you hear the news? Trump has announced his re-election bid.

Well, he does need more time to make America great again.

Well if the Democrats can't manage to run someone more competent and less obviously corrupt than Hillary Clinton, he'll get his chance.

Yes I know all that, I was just highlighting the usual partisan hypocrisy. Oh that Orzag, what a scumbag, no sense of personal responsibility because he liked to throw it around. But yay Trump! If you like your boy Trump, you can no longer use morality arguments against the other team, unless you are a moronic hypocrite.

Good, maybe people will be sick of it by the time 2020 rolls around.
There is something to be said for the boredom of the electorate and a fresh face.

He's a breeder, 5 kids with three different women. Well done, if you ask me (though it's better to have a big family with one woman). Reminds me of someone.

Yes, the article is pretty useless. The answer is obvious to anyone who spends 5 minutes thinking about it (fewer children, better investment opportunities).

The decline of the middle class. Sure, wealthy people buy life insurance, not because it's life insurance, but because "life insurance" (i.e., the "cash value") is exempt from claims of creditors in some states (mine included). Heck, our current governor moved to my state because of all the laws that protect assets from the claims of creditors. Got to protect widows and orphans.

Interesting, though the places I loudly look first are family structure and income (demand side) and ease of access (basically supply side).

Each of these may have a whole lot of sub factors a such as more female employment, more contract based employment, less propensity for the man to be drafted to the military to name a couple of many.

I vote for the theory that people have grown less trusting of corporations. Life insurance policies are not very straight forward. They can be confusing. Life insurance companies do a very poor job of explaining how their products work. And people nowadays believe that if a salesman is explaining something to you then there is a good chance that he is not telling you the whole story and probably selling you something not in your best interest but in his best interest. Were people more trusting 50 or 100 years ago? Maybe. But in the age of Trump one needs to be veeeerry cautious when dealing with someone in the insurance industry.

No offense if you work for the industry, but you have done nothing to impress upon people that we should trust you. The irony is that with the internet one would think finding informtion on insurance would be easy. But the reverse is true. Like Trump's strategy of blowing untruths all over the media landscape in order to confuse and distract the population, the amount of inane and simplistic advertising from the industry has just saturated the public with distrust.

"But in the age of Trump one needs to be veeeerry cautious when dealing with someone in the insurance industry."

The "Age of Trump"? I'm not convinced there have been drastic changes in the Life insurance industry over the last 13 months or so. This comment seems more like Presidential Derangement Syndrome, whereby any negative fact is immediately attributed to a given President that the poster doesn't like.

Term insurance is pretty straight forward, and that’s what most people should be buying. If you are doing estate planning with life insurance, ILITs, etc., you can afford and probably should pay for professional advice (from someone other than the insurance seller).

Before we had kids, I had the default 1x salary from my employer. Wife was an engineer as well. When we decided to have kids, I bought the optional 3x additional coverage, and also10x coverage via IEEE, to insure I would have coverage even if I lost/changed jobs. Also bought via IEEE 5x on the wife, to cover child care if needed.

We dropped hers when the youngest turned 14, mine when they finished college. It’s cheap in your 20s-40s.

But then you are an engineer and therefore probably numerate, intelligent, and responsible.

Well, there is that.

Medicaid asset limitations for long term care may be a contributing factor. Life Insurance policies can count as an asset:
The cost of LTC policies has increased sharply so Medicaid eligibility has become a primary objective for many elderly folks’ financial planning. With respect to working age folks, the percentage of employees offering life insurance benefits has declined significantly with today only about 55% of employees in private industry being offered life insurance as a benefit (see table 5: )

But why would employers cut back on life insurance benefits? Increased cost of health insurance benefits:

ACA mandated benefits of course did not help.

It is truly scary that Orszag actually was confirmed as OMB Director. How did that happen?

But the ACA decreased the cost to employers of health insurance you claim? No. The delusional claptrap spewed about how the ACA would contain costs should be an embarassment to a lot of people.

Actually, healthcare costs overall have been increasing at a slower rate post-ACA, but where that is due to the ACA or not is anyone's guess.

If a company was not providing health insurance before the ACA it most likely was not providing life insurance either, and companies that were provided health insurance (and maybe life insurance) were not stuck with a new expense because of the ACA so the ACA mandate is probably innocent in this matter.
The decades-ongoing inflation in health insurance however is a good explanation for the decline of the life insurance benefit.

One of the reasons for the decline in life insurance purchases is the gradual elimination of the estate tax. People purchased life insurance to cover the estate tax.

The vast majority of people were never subject to the estate tax.

this is patently not true.

When the estate tax was $1mm, it was easy enough to own what might comparitively be a modest house or apartment in either a major metro area, or somewhere beautiful such as california, and already be close to or over the estate tax.

The difference between a 1 or 2 million dollar exemption and a $10 million dollar exemption is pretty fast. Just saving a normal amount on a slightly above average income into a 401k often left a healthy IRA with compounding. And the generation that is now mostly dead, the silent generation, were prodigous savers given they grew up in the era of the great depression.

Those people had estate tax challenges. The final piece, of course is that some states, such as New Jersey, had tax exemptions even SMALLER than the federal limit (and still do).

This is the thing that peter orszag pretty easily missed IMO

We have safer lies, generally. Fewer people do really dangerous work (like farming and mining). Fatal car accidents have declined dramatically because of improved safety and strong penalties against drinking and driving.

Overall, our chances of dying unexpectedly have decreased. So why buy insurance?

This is quite true. My Grandfathers brother died when he was in his mid 40's in the 70's I believe. Nowaydays, that "Dad died in middle age, what do we do now" scenario is far less common.

No real mystery, most policies are "permanent" (misnomer) or whole life insurance, which is no longer as attractive as in 1965. It was sold as a combination insurance & investment, and is not a very good bargain for anyone but the insurance company & sales agent. Back when most people's portfolio's included a savings account or US Savings Bonds at most, it was a reasonable alternative with an attractive pitch: if you don't die before retirement, you get something back.

With the advent of discount & online brokers, those same people can have much better investments in stocks in their 401 (k) plans & individual accounts. Insurance needs can more economically & efficiently be met with term insurance.

I think this is pretty much it. Few people are truly interested in a long-term death benefit, and cash value life insurance is no longer very appealing as an investment vehicle. I would just add that within the insurance industry as well there has been a move toward investment oriented products. Total annuity reserves (traditionally a comparatively small business) surpassed life reserves sometime in the early 1980s. Part of this was due to the interest rate spikes in the late 1970s when most cash value products had been originally priced with 3-4% interest assumptions and weren't designed to be responsive to market rates. I don't know all the tax law changes off the top of my head, but I believe the 1986 tax reform also limited the appeal of cash value life insurance as an investment vehicle (while being more favorable to deferred annuities).

General decline in the attractiveness of non-cash compensation as tax rates have dropped?

Within the last 10 years, the IRS began taxing employer provided life insurance over $50,000. You can see the extra income show up on box 14 of your W-2.

Occam's Razor might suggest something as simple as people don't trust life insurance salesmen.

Yes, this is very true as scammers have adopted the threatening language of the legal professions (amongst which I would include insurance people) so as to be almost indistinguishable.

In addition, the imposition of Identity Purity checks for every conceivable transaction, even different ones with the same firm, discourage people from doing anything financial. Presumably they apply to insurance agents. I have seen them demanded by accountants who are just doing accounts, not even transferring funds. There is a very narrow range of evidence that customers have to give that is admissible, and people who don't leave a paper trail throughout their lives can be excluded.

“In 1989, 76 percent of Americans with a high school diploma owned any kind of life insurance. By 2013, that share had declined to 55 percent”

The type of person who just had a high school diploma in 1976 is not the same kind of person who just had a high school diploma in 2013 or today. The equivalent today would be someone with an associate’s degree or a BA. When you start with a flawed system for comparing people across time, the rest of your numbers are basically worthless.

Where there really that many HS dropouts/non-completers in '89? Nobody in my family, going back generations, failed to complete HS. Quite a few never did a BA or Grad education though.

I wonder if it has anything to do with the change in family structure. Two income households, less marriage etc...

I once worked in a company with a lot of cash-value life insurance salespeople. Here's the
case from the other side:

If you are smart enough to be reading this blog, you should probably buy term and invest
the rest, assuming you have the executive function/discipline to do so. For a lot of people,
the only way they are ever going to get coverage AND save for retirement is if a sales
person reaches them gets them to buy something. This is better than nothing, even if the
product is not optimal in terms of fees/rates of return etc. The overal effect is a net
social good, with more people covered and saving.

Assuming people do need life insurance (more than is offered by employers),
and do need to save, I think these sales people deserve their commissions. THey have one
of the most thankless jobs around: everyone hates insurance sales people - is this
because they rip people off or is it because they have to tell people some bad news:
1) you are going to die and 2) you need to sacrifice (spend less , save more.) ??
I would say its as much the latter as the former.

Also, while the products are often criminally complex, they are heavily regulated
with suitability and competitiveness requirements. While these don't do enough to
equalize them with buy term and invest the rest, they do limit the damage.

+1, it's not totally black and white. Still the answers above are obviously true as to why less insurance is being bought.

I don't think the intersection of people who won't put money in a 401K or IRA but will faithfully pay an insurance premium for decades is very large. The vast majority of policies lapse (at a loss) once they realize the policy makes no sense for them or are unable to continue paying for whatever reason. People lacking "executive function/discipline" are not likely to have the *extreme patience* required for cash value life insurance which usually takes over a decade to break even.

Life insurance is for your estate, and middle class people are not wealthy enough to be leaving significant estates and are lucky just to have enough for retirement. Surrendering a policy to fund retirement is a lousy idea, as is taking out loans against the policy. Any surrender in excess of the your premium basis is taxable as ordinary income. Loans accrue interest and will cause the policy to lapse once the loan balance surpasses the cash value. At that point, all gains become taxable even if you already spent the money.

Intended to be a reply to doniel.

Two things come to mind, good and bad.

BAD - Life insurance is to protect income and wealth from an early death. But if your wealth is minimal or your income lower or less likely, then life insurance has less purpose.

GOOD - Many people had over priced policies pushed on them by aggressive salesmen. For example, whole life policies you can borrow from or that turn into an annuity after so many years of inflated premiums. A 401K or IRA is almost always a better option than such policies and perhaps people became less gullible to bad policy products than they used to be.

Single people don't need life insurance--who would it be for? Rising single-hood will reduce the demand. For other than term insurance, it turns out not to be a great investment per se compared to the stock market or a home, so the relative shift toward term insurance makes sense. In 1965 welfare and social security were minimal (pre-great society) so life insurance made more sense, especially for the poor, compared to today.

Life insurance can be used to pay for cryonic suspension.

Yes it can, but it is still better to use term insurance plus investment building. Cryonics has a peculiar feature. It relies on massive technological growth. If there is no or little technological growth, then no cryonicist will survive to observe the failure of their investments.

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