You Have No Idea What Life Insurance Costs and It's Hurting Your Family

NEW YORK (TheStreet) — Most Americans say they won't buy life insurance because it's too costly. Most don't know what it costs.

Nonprofit organization Life Happens — which just happens to be supported by 140 insurance companies and financial service organizations — found that 80% of consumers have no idea what life insurance costs. Members of Generation X think it's 119% higher than what it is, while Millennials misjudged the average cost by 213%.

Unfortunately, because the folks selling life insurance are about the only ones willing to tell anyone what life insurance costs, those views of its expense probably aren't changing anytime soon. The Life Happens study found that 30% of Americans believe they need more life insurance, while 43% they'd be in a tough spot in six months if a wage-earning member of their family died. That said, 54% of Americans have absolutely no plans to buy life insurance within the next year.

"We've consistently seen over the last five years that consumers think life insurance is more expensive than it really is, and now we're seeing many are also confused as to what factors determine the cost for life insurance," says Marvin Feldman, president and chief executive of Life Happens. "We need to help educate the public about how affordable life insurance can be and the factors they can control to ensure they get the best and most comprehensive protection possible."

When life insurance is considered way too costly, it isn't considered a priority. When it isn't a priority, it takes a backseat to just about everything else. Among the youngest consumers, 29% percent of Millennials cited saving for vacation as a priority over buying some or more life insurance. Meanwhile, 23% of Gen Xers would rather go out to eat, hit the movies or go shopping than buy more life insurance. Even 49% of those 65 and older cited paying for expenses such as Internet, cable and cellphones as more important than life insurance — and 60% of Millennials said they agree. It's somewhat of a gamble, but they like the odds.

“As the general population has been getting more active, eating right and living healthier lifestyles, the average price of insurance products has been improving as well,” says Ralph Proceviat, chartered life underwriter and financial consultant with Patriot Brokerage Services in Westborough, Mass. “The average life expectancy of a male in the United States is now 78.8 years and for a woman, it is 81 years. Improvements in health care, pharmaceutical drugs and the avoidance of cigarette smoking are expected to continue this positive trend.”

While all of the above could be reasons to put off buying life insurance, they're also a great way to keep insurance costs down. Reporting weight loss, beginning a tobacco cessation program and following prescribed treatment for chronic conditions can all result in savings on monthly premiums. Laura Adams, senior analyst at InsuranceQuotes.com, notes that term life insurance for a 25-year-old smoker costs $456 more per year on average than it does for her non-smoking counterpart. By age 65, that gap widens to a whopping $8,503 per year. For men, the annual divide in life insurance payments between smokers and nonsmokers starts at $594 per year at age 25 and balloons to $10,975 by age 65.

That's just for the cheapest option. Term life insurance is limited in length and, by design, usually ends before average life expectancy. Proceviat notes that only 2% of term policies result in death claims, which makes them relatively inexpensive. The shorter the length of coverage, the less of a chance that a claim will be paid, the cheaper the coverage.

“Permanent products such as universal life and whole life, on the other hand, are permanent products and can be retained by an insured as long as they live,” Proceviat says. “The insurance company knows that these policies can be retained for life, so the expectation is that the majority of these polices will end up as death claims and therefore the price is higher.”

There are a whole lot of other factors that can affect the cost of life insurance. Do you have a safe driving record and a good credit score? Life Happens says each of those help knock down premiums. Are you a logger, commercial fisherman, professional piloting, roofer or iron worker? Data from the Bureau of Labor Statistics that puts your career among those with the most fatalities will also raise your premiums, according to InsuranceQuotes. Like skydiving, boat racing or scuba diving? Those hobbies all tend to make life insurance a bit less affordable as well. Life insurance doesn't have to be all that expensive, but it's hard to keep the costs down and make an informed decision when nobody's telling you the stakes.

“There will always be a need for life insurance to cover things that happen in life unexpectedly; from covering a wage owner with a young family, to the affluent older client looking to transfer wealth to heirs in the most efficient way possible,” Proceviat says. “The good news is costs have been declining, making access to these products more available and affordable to the average consumer.”

— Written by Jason Notte in Portland, Ore.

To follow the writer on Twitter, go to http://twitter.com/notteham.

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.

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