Changing the way black Americans use life insurance could help close the racial wealth gap
Black Americans are more likely to purchase life insurance than the average American, but their coverage does little more than cover funeral costs.
Fifty-six percent of black Americans have life insurance, according to a study by LIMRA and Life Happens, compared to 52% of all Americans. But 46% remain underinsured, their benefits not being sufficient to replace income or ensure a transfer of wealth between generations.
But greater coverage could help close the racial wealth gap, experts say, but many black Americans are missing out due to financial problems, a misunderstanding of how life insurance works and mistrust towards the industry as a whole.
“What I hear is, ‘My parents didn’t help me, so I’m just going to bury myself’…[leaving] every generation starts over, unlike other communities where they pass on a legacy to the next generation,” said Wendy Edwards, a financial services professional with more than 30 years of experience representing New York Life and others. insurers, to Yahoo Money. “Instead, we have financial loss and emotional loss creating a recipe for disaster.”
“It’s simple math”
Much like insuring a car or home, life insurance protects an individual’s earning potential, providing their family with a financial legacy if something happens to them.
The rule of thumb is to have 10 times your annual income in life insurance, according to the insurance nonprofit life happensto cover expenses beyond the funeral such as housing, mortgage, childcare, health care and education, so your family is debt-free.
Even if you only earn $40,000 a year and work for at least 35 years, your human capital would be $1.4 million. But many black Americans ignore this way and therefore pass on smaller windfalls to their heirs.
Only 10% of black families receive a wealth transfer, compared to 46% of white families, according to a 2014 study. The median transfer for black families who receive an inheritance is $52,240, or 60% less than the median transfer for white households.
“Does anyone teach our people that your human capital is worth millions?” Edwards said.
“It’s a simple math,” Edwards added. “If you make $100,000 a year and work for 35 years, your human capital is worth $3.5 million. You pay a life insurance premium and automatically create an estate for that amount, whatever it is. But I still get calls about funeral insurance.
One of the reasons black Americans may be underinsured is lack of resources.
The average black household income was $60,276 in 2020, according to the census bureau, compared to $86,770 for white Americans. Black workers are historically hit harder by recessions — including the last one during the pandemic — suffering disproportionate job losses and an unemployment rate that takes longer to recover.
In a 2021 LIMRA study, black Americans voiced these worries about money and were more likely to report concerns about saving for emergencies, reducing student debt, and paying monthly bills than Americans together.
“When you have enough savings that the ‘survival threat’ is no longer apparent, you can afford to look further down the path to wealth building and think about where you want to be in 20 years,” Dr. Pamela Jolly, CEO and founder of Torch Enterprises, a strategic investment firm, told Yahoo Money. “Bold goals and plans require a margin of safety so you can afford to take a risk; but if you can only afford to see a good meal, you cannot build a place of economic security.
“A disservice to the black community”
There is also a long history of distrust of financial institutions, including insurers, among black Americans.
For example, MetLife, The life of John Hancockand other life insurance companies in the early 2000s “settled multimillion-dollar civil rights lawsuits involving race-based life insurance rates and benefits,” as reported in the Northwestern Journal of Law and Social Policy”End of Jim Crow life insurance rates“, for the practice of charging black Americans more for life insurance – marketed as funeral insurance – that was of little value compared to the premiums paid. This continued into the 1970s.
“The insurance industry and financial services have done a disservice to the black community,” Dr Jolly said.
Again this year, the Casualty Actuarial Society also recognized “the potential impact of systemic racism on insurance underwriting, pricing and claims practices” in its report. Methods for quantifying discriminatory effects on protected classes in insurance.
“So when I say you can’t have enough insurance and you need at least half a million policies, they see me as ‘Oh she just wants to make money off of me’ “, said Edwards. “This is where you lack confidence.”
Understand the ‘many benefits of permanent life insurance
Life insurance can also be complex for everyone with many different types of products with varying pros and cons. For example, you can survive a term life insurance policy, while permanent life insurance policies have a cash value in addition to death benefits that can be invested.
The LIMRA study found that 68% of Black Americans who have individual life insurance have permanent life insurance for the purpose of using cash value for burial costs and final expenses. But this use misses other ways cash value can be used to help build wealth.
“One of the greatest benefits of permanent life insurance is the ability to accumulate cash value that grows tax-deferred,” Mark Williams, CEO of Brokers International, told Yahoo Money, “and can be accessed as loans, withdrawals or surrenders for the life of the policy,”
Cash value can be used as a vehicle for retirement savings or to finance a business, college education or the purchase of a home, all of which are ways to build wealth.
“There are so many benefits to a permanent life insurance policy,” Edwards said. “I got a call from a client who said, ‘Wendy, I miss the kids’ school fees.’ Alright, I’ll send you $10,000 of your policy. Another client called and said they had run out of closing costs on their home. Little did they know they could use the cash value of their permanent life insurance to fund these things.
“It takes three generations to create inherited wealth, one generation to lose it, and four generations to solidify it,” Dr. Jolly’s research has shown on barriers to wealth creation in the black community.
Outside of home ownership, life insurance is one of the most common avenues for wealth creation – if used correctly. There is no one size fits all. It is just as important for heirs to think about the future when they benefit from a windfall of life insurance to build up an estate.
“Early in my career, a client was struggling to pay his premiums. When he died, his son bought a Maxima with the insurance proceeds and drove it off the road the following week. I was so angry,” Edwards said. “Now I see beneficiaries asking how to invest the proceeds and start their own business from the life insurance proceeds.”
Ronda is a senior personal finance reporter for Yahoo Money and an attorney with experience in law, insurance, education and government. Follow her on Twitter @writesronda