It's enough to make an insurance agent tremble: Millions of cash-strapped Americans are saving money by going without life insurance.
Ownership of life insurance has reached a 50-year low, according to industry research firm LIMRA. Thirty percent of households (35 million) aren't covered, up from 22 percent in 2004. Among households with minor-aged children, 11 million have no coverage.
Insurance salespeople have sounded the alarm, warning that penny-wise and pound-foolish habits could leave loved ones devastated if a death occurs. Financial advisers agree that many Americans probably should have at least a little life insurance. But experts also urge people who are pressed for cash to keep in mind the ultimate goal: limiting risk for survivors. Life insurance isn't the only way to accomplish that goal.
"Say you didn't have any kids, your spouse has a law degree, and you don't owe a lot of money in your business. You may not need to get life insurance," says Bill Gustafson, senior director of the Center for Financial Responsibility at Texas Tech University in Lubbock. "Because she's got human capital, she'd be able to enter the labor force if something happens to the other person."
So what are other ways to limit risk for the survivors? Start with estate planning, financial advisers say. People with dependents should use such instruments as wills and trusts to direct assets in a tax-efficient manner to survivors, according to Stuart Armstrong, a certified financial planner in Needham Heights, Mass. Those who take such steps might still need some life insurance, he says, but they may not need as much – or may not need any if assets are substantial enough.
Even those with few or no assets can benefit from estate-planning principles, planners say. For example: Inexpensive wills can provide for guardianship of a child or a dependent elder. If a head of household makes arrangements with trusted family members to provide for dependents, then that person has substantially cut his or her survivors' risks, according to Tom Fisher, a certified financial planner in Cambridge, Mass. This approach might function as a type of de facto insurance policy, he says, in families that cannot afford life insurance – or who choose not to carry it.
Get a verbal agreement, at least
"I would certainly encourage them to make sure they've had that conversation [about providing for dependents], rather than just assuming it," Mr. Fisher says. "It's not so much a matter of getting it in writing, if you trust your family, but you do want to make provisions [for] guardianship."
Lifestyle planning can go a long way, too. Consider a couple who has two children, lives in a four-bedroom house, and depends on one primary income. If the at-home spouse has marketable skills, then she or he might draft a realistic plan for carrying on after being widowed.
Example: Rejoin the workforce, downsize to a smaller home, and otherwise cut expenses. A well-conceived plan means a household doesn't need a life insurance policy that would sustain a current lifestyle because the lifestyle is certain to give way to a more sustainable one.
Cut down on debt
Other techniques can reduce risk as well. Mr. Gustafson recommends keeping debt levels low, since a surviving spouse can inherit debt as well as assets. People who aren't eligible for life insurance, such as someone living with chronic health conditions, might want to look into the death benefits available through variable annuities, Fisher says. He cautions, though, that annuities typically come with high fees and modest death benefits.
Families might use multiple strategies for cutting risk for survivors, Mr. Armstrong says. But few financial instruments offer a tax-free lump sum payment at a time when it's most needed. For that reason, he says, life insurance is often worth carrying, at least when children are young and risks are substantial.
"A lot of guys don't realize that a wife, especially, needs that security of knowing she'll be able to go on if something were to happen to her husband," says Jan Henryson, director of the nonprofit Center for Financial Education in Sioux Falls, Iowa. A growing number of her clients are trying to save money by forgoing life insurance. Since most of them don't have an alternative strategy, she urges those with young children to investigate getting life coverage through employee benefits plans.
Some with kids do well to lock in premiums on 15-year coverage plans, she added. "We encourage them very strongly, if they are insurable, to look for a term life policy that is pretty inexpensive for the coverage you can get and the security you can provide for your family."
A healthy nonsmoker under age 40 can get a $250,000 policy for less than $25 per month, according to Mike Halloran, a Jacksonville, Fla., insurance salesman and president of the National Association of Estate Planners & Councils.
"The biggest thing life insurance has going for it is the tax-free death benefit that you get in most cases," Armstrong says. "There aren't many assets that can rival that, especially when you're paying pennies on the dollar to get that death benefit."