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The Life Insurance Coverage Gap and Why It Matters

Black Americans typically have one-third of the coverage of their white counterparts—here's why
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By Georgia Rose

The relationship between life insurance and the African-American community is complex. Although Black Americans are more likely to own life insurance than whites, a recent study shows, their coverage is often far less.

The sizable coverage gap between Black and white Americans has many causes, experts say, including the way life insurance was sold in the Black community and how discriminatory practices have impeded access to coverage.

Without adequate life insurance, families may find it difficult to protect and pass on assets to the next generation. It’s not always obvious how much life insurance is enough, but there are ways to calculate the right amount of coverage.

What Is the Life Insurance Coverage Gap?

Black Americans typically have one-third of the coverage of their white counterparts, according to a 2020 study by Haven Life, an insurance company. Both groups had less than the recommended coverage amount outlined in the study of five to 10 times annual income. But Black respondents reported having life insurance equal to about a year’s income, compared with almost three years’ worth for whites.

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Having the right amount of life insurance can help beneficiaries cover costs like living expenses or debts. And given the Covid-19 pandemic, this safety net perhaps feels all the more necessary.

But historically, life insurance was often sold to African Americans as burial insurance — smaller, cheaper policies that cover the bare minimum. “Those door-to-door salesmen weren’t always truthful with them,” says Jessica Smith, an insurance agent in Marietta, Georgia, and clients weren’t told about other options.

Causes Behind the Coverage Gap

After the Civil War, insurers began classifying Black people who were former slaves as higher mortality risks, meaning they were charged more or denied coverage altogether. These practices stretched into the 1960s, with separate sets of rates for Black and white applicants. Some states banned race-based underwriting, but many insurers simply took their business elsewhere, reducing access to coverage and segregating the industry.

For a long time, Black people were “excluded from the conversation of just protecting their assets and protecting their loved ones,” says Malcolm Ethridge, executive vice president and financial advisor with CIC Wealth.

Insurance companies would also find creative ways to not pay claims, Ethridge adds, “so then there became this level of mistrust between the Black community and the insurance world.”

Years of discriminatory policies also reduced access to medical care, housing and education for many Americans, and all these things can factor into the cost of life insurance.

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If an applicant with a high school diploma, living in a poor neighborhood, applies for the same $2 million policy as someone with a Ph.D. living in an affluent neighborhood, the less educated applicant may get approved for coverage but will likely pay more for it, Ethridge says.

If premiums are too expensive, coverage becomes inaccessible, wealth may be harder to pass down, and the situation compounds.

Why the Gap Is a Problem

The legacy of segregation, redlining and discriminatory policies has made accumulating generational wealth a challenge for many in the Black community, and the Haven Life study found that Black Americans are more likely than whites to think of life insurance as a way to pass down generational wealth.

This approach poses a problem when a person dies and is underinsured. In this case, assets that would have been passed down are often liquidated to pay for expenses, and less wealth is passed on, Ethridge says.

Getting the Right Amount of Coverage

Many of these causes are the result of bigger historical and social issues, making it hard for policyholders to close the gap themselves. And being underinsured isn’t always easy to recognize.

If you’re not sure whether you have enough coverage, a financial advisor, insurance agent or online calculator can help you estimate how much life insurance you need.

“We first want to figure out what they want the life insurance funds to do for them once they’re gone,” Smith says. “Then we have to determine what amount of money they would need to achieve that goal.”

If people rely on you financially, you may want a large payout to support them for multiple years after you die. Alternatively, if you don’t have any financial obligations or dependents, you may not need coverage at all.

In general, term life insurance is sufficient for most families. These policies are valid for only a set number of years and are typically less expensive than permanent life insurance.

This article is reprinted by permission from NerdWallet.

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Georgia Rose writes for NerdWallet. Email: grose@nerdwallet.com.