Most Americans overestimate life insurance costs while underestimating health risks

A critical misconception about life insurance has persisted among Americans for decades. A staggering 82% of individuals continue to overestimate the costs of life insurance. This prevailing miscalculation has far-reaching consequences, and often deters potential policyholders from securing the protection they and their families need.

At the same time, Americans tend to significantly underestimate their health risk, believing they are healthier than they actually are. The ramifications of this prevailing delusion, particularly in the realm of life insurance, are profound, for it blinds people to the vital role that their health risk plays in their insurability.

For life insurance professionals, it is vital to help clear up these blind spots. Only then will people begin to understand that securing life insurance sooner rather than later is a strategic move that can yield significant advantages.

The disconnect between health and life insurance

I’ve been in the insurance business for more than 30 years and a seismic shift has occurred in the industry over that time. This shift has altered not only the way health insurance operates but how Americans perceive insurance in general. When I entered the business, everyone knew that the cost of their health insurance would be related to their health. In other words, those with pre-existing medical conditions could expect to pay higher premiums, reflecting the increased risk they posed to insurance providers.

But then, beginning in the 1990s, some states started providing guaranteed issue health coverage. As time went on, more states started doing this until the federal government stepped in and provided guaranteed issue coverage through the Affordable Care Act. That takes us to where we are today, in which pre-existing medical conditions can no longer be considered when underwriting health insurance. Instead, the only things that can be considered are age and demographics – for example, this person is 30 years old, single and lives in Los Angeles.

As a result, we now have one or two generations of Americans who have grown up in a world where their health risk has zero effect on their health insurance rates. The problem with that is these people seem to believe all insurance works this way, which isn’t the case. Health risks are still a factor in life insurance underwriting and many people are stunned when they learn this. The variance in premium rates between a healthy and unhealthy person is not small either. It can be massive.

For example, a super-healthy person might pay only $20 a month for life insurance. By contrast, someone who's very unhealthy could pay $500 a month for the same policy. To make matters worse, the average American today is significantly unhealthier than ever before. The statistics bear this out, with U.S. obesity rates tripling over the last 60 years. Ask any life insurance agent, though, and they’ll tell you the average applicant is a very poor judge of their own health. The result is a mixture of people with mistaken perceptions of their own health status and the cost of insurance.

Educating the public

These misconceptions emphasize the need for clear, accessible information on how life insurance rates are determined. The starting point lies in conveying that the healthier a person is, the lower their premium rates will be. To encourage this understanding, life insurers should focus their marketing efforts on illustrating how significant rate disparities can be between two opposing individuals.

Most Americans are likely aware that the cost of life insurance is related to their age. However, what many don’t know is once you buy a life policy, the rate stays the same for the duration of the policy. That means if you buy a whole-life policy at age 30 then you’ll pay as a 30-year-old for the rest of your life.

Another thing people don’t realize is just how much their rate can change as they get older. Typically, the cost for someone who’s 18 years old might be $160 a year, versus $400 for someone who’s 30, which really isn’t that big of a jump. However, once a person enters their 40s, their rate can surge by 10% to 40% each year. This underscores a critical point I always try to bring up which is that you don’t buy life insurance with money, you buy it with age and health status.

The prevailing misconceptions surrounding life insurance and health risks have created a significant gap in the understanding of insurance costs among the American populace. While health insurance is now guaranteed, life insurance still regards health status as a crucial element in determining rates, a fact that often comes as a surprise to many people.

Ultimately, the central argument that insurance professionals need to get across to the public is that people should obtain life insurance while they are still young and healthy. Delaying this decision will only lead to escalating costs as an individual’s health status deteriorates with age.

Bob Gaydos is the founder and CEO of Pendella. He may be contacted at bob.gaydos@innfeedback.com.

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