Why is insurance misunderstood? Corebridge study sheds light

One of the most striking revelations from the Corebridge Financial study is the widespread misconception about the cost of various insurance products. These misunderstandings can significantly impact decision-making when it comes to purchasing insurance coverage.

Life insurance cost perceptions

The study found that Americans tend to overestimate the cost of life insurance dramatically. On average, respondents believed that a healthy 30-year-old would pay $500 per year for a 20-year, $250,000 term life insurance policy. In reality, the actual cost is closer to $160 per year – less than a third of what people expected.

This misconception about life insurance costs can have serious consequences:

• Deterring individuals from seeking coverage due to perceived unaffordability.
• Causing people to underinsure themselves and their families.
• Leading to missed opportunities for financial protection and peace of mind.

Disability insurance cost perceptions

Similar to life insurance, there's a significant gap between perceived and actual costs for disability insurance. The study revealed that respondents estimated the annual cost of disability insurance to be around $200 per month. However, the actual cost is typically much lower, often ranging from $50 to $150 per month, depending on factors such as age, occupation and coverage amount.

This overestimation of disability insurance costs can result in:

• Individuals foregoing crucial income protection.
• Increased financial vulnerability in case of disability.
• Missed opportunities to secure one's lifestyle and financial obligations.

Long-term care insurance cost perceptions

Long-term care insurance is another area where cost perceptions are significantly skewed. While the study didn't provide specific figures for long-term care insurance cost misconceptions, it's worth noting that this type of coverage is often perceived as prohibitively expensive. In reality, the cost can vary widely based on factors such as age at purchase, health status and coverage options.

The impact of these misconceptions about long-term care insurance costs includes:

• Delayed purchase of coverage, potentially leading to higher premiums or ineligibility.
• Inadequate preparation for potential long-term care needs in retirement.
• Increased financial burden on families and caregivers.

The Corebridge Financial study also highlighted significant uncertainties and knowledge gaps when it comes to understanding insurance coverage. These uncertainties can lead to inadequate protection and potential financial vulnerabilities.

Life insurance coverage gaps

While many Americans recognize the importance of life insurance, there's considerable uncertainty about how much coverage is needed. The study found that:

• 45% of respondents were unsure about how much life insurance coverage they need.
• 40% of those with life insurance weren't confident they had enough coverage.
• Only 33% of respondents felt very knowledgeable about life insurance.

These uncertainties can result in:

• Underinsurance, leaving families financially vulnerable in case of unexpected death.
• Overinsurance, leading to unnecessary expenses and reduced financial flexibility.
• Delayed decision-making due to confusion about coverage needs.

Disability insurance knowledge gaps

The study revealed significant knowledge gaps when it comes to disability insurance:

• Only 20% of respondents felt very knowledgeable about disability insurance.
• Many were unaware of the likelihood of experiencing a disability during their working years.
• There was confusion about the difference between short-term and long-term disability coverage.

These knowledge gaps can lead to:

• Inadequate income protection in case of disability.
• Misunderstanding of employer-provided disability benefits.
• Missed opportunities to secure comprehensive disability coverage.

Long-term care insurance uncertainties

Long-term care insurance is perhaps the least understood of the three types of coverage examined in the study. Key findings include:

• Only 14% of respondents felt very knowledgeable about long-term care insurance.
• Many were uncertain about the costs of long-term care and the likelihood of needing it.
• There was confusion about what long-term care insurance covers and how it differs from health insurance or Medicare.

These uncertainties can result in:

• Lack of preparation for potential long-term care needs in retirement.
• Misunderstandings about the limitations of government programs like Medicare.
• Delayed purchase of long-term care insurance, potentially leading to higher premiums or ineligibility.

Understanding the factors that drive individuals to purchase insurance is crucial for both consumers and the insurance industry. The Corebridge Financial study provided valuable insights into these motivations.

Life insurance motivations

The primary motivators for obtaining life insurance include:

• Desire to provide financial security for loved ones (cited by 68% of respondents).
• Peace of mind (cited by 66% of respondents).
• Covering funeral and final expenses (cited by 63% of respondents).

Other significant motivators included:

• Paying off debts and mortgages.
• Replacing lost income.
• Leaving an inheritance.

Interestingly, the study found that younger adults (ages 18-34) were more likely to cite covering debts and mortgages as a primary motivation compared to older adults.

Disability insurance motivations

The key motivators for obtaining disability insurance were:

• Protecting income in case of inability to work (cited by 65% of respondents).
• Peace of mind (cited by 62% of respondents).
• Covering living expenses during disability (cited by 61% of respondents).

Additional motivators included:

• Maintaining financial independence.
• Protecting savings and retirement funds.
• Covering medical expenses not covered by health insurance.

The study noted that individuals with higher incomes were more likely to recognize the importance of disability insurance in protecting their lifestyle and financial obligations.

Long-term care insurance motivations

While fewer respondents had long-term care insurance compared to life and disability insurance, the primary motivators for those who did included:

• Desire for independence and not burdening family members (cited by 67% of respondents).
• Peace of mind (cited by 65% of respondents).
• Covering the high costs of long-term care (cited by 63% of respondents).

Other significant motivators were:

• Protecting assets and savings.
• Ensuring quality care in case of chronic illness or disability.
• Supplementing government benefits that may be insufficient.

The study found that older adults (ages 55+) were more likely to recognize the importance of long-term care insurance and cite these motivations.

Given the misconceptions, uncertainties and varied motivations revealed by the Corebridge Financial study, it's clear that there's a need for improved insurance literacy and decision-making among Americans. Here are some strategies to address these issues.

Education and awareness

• Seek out reliable information from reputable sources, including insurance providers, financial professionals and educational websites.
• Attend workshops or seminars on insurance and financial planning, particularly those tailored to individuals nearing retirement age.
• Utilize online calculators and tools to estimate insurance needs and costs more accurately.

Personalized assessment

• Conduct a thorough evaluation of your financial situation, including current assets, debts and future financial goals.
• Consider your family structure, health history and lifestyle factors that may impact your insurance needs.
• Regularly review and update your insurance coverage as your circumstances change.

Professional guidance

• Consult with a licensed insurance agent or financial professional who can provide personalized recommendations based on your unique situation.
• Don't hesitate to ask questions and seek clarification on any aspects of insurance coverage you don't fully understand.

Employer resources

• Take advantage of any insurance education or resources offered by your employer.
• Carefully review your employer-provided insurance benefits and understand how they fit into your overall coverage needs.
• Consider supplementing employer-provided coverage with individual policies if necessary.

Long-term planning

• Start thinking about insurance needs early, as premiums are generally lower when you're younger and healthier.
• Consider how your insurance needs may change throughout different life stages, including retirement.
• Integrate insurance planning into your overall financial and retirement strategy.

The Corebridge Financial study provides valuable insights into the complex landscape of insurance perceptions, misconceptions, and motivations among Americans. By understanding the common false beliefs about insurance costs, addressing uncertainties regarding coverage and recognizing the factors that drive individuals to obtain insurance, we can make more informed decisions about our financial protection.

As we approach retirement age, it's crucial to take a proactive approach to insurance planning. This includes:

• Educating ourselves about different types of insurance and their importance.
• Accurately assessing our insurance needs based on our unique circumstances.
• Seeking professional guidance when necessary.
• Regularly reviewing and updating our coverage.

By addressing the knowledge gaps and misconceptions highlighted in the study, we can work toward creating more comprehensive and effective insurance strategies. This, in turn, can lead to greater financial security, peace of mind and protection for ourselves and our loved ones as we navigate the retirement years and beyond.

Remember, insurance is not just about mitigating risk – it's about empowering ourselves to live with confidence, knowing that we've taken steps to protect our financial future. By staying informed and making thoughtful decisions about our insurance coverage, we can build a stronger foundation for a secure and fulfilling retirement.