Life Insurance in Usa

Purchasing life insurance is a widely accept money management approach in United States. People are willing to buy life insurance to avoid paying inheritance tax and financial hardship for families due to their death. It has been found that life insurance industry, being a financial intermediation, has contributed significantly to economic growth over a 30-year period (USAID, 2006) in USA. However, a research by Standard & Poor's (S&P) (Gaskel, 2011) has drawn attention, which shows that the number of individual life insurance purchased annually has dropped 42% from 17500 policies in thousands to about 10000 policies in thousands in the past 20 years. Despite the substantial contribution to economic growth, the problem that the overall coverage of life insurance has been dropping in USA comes to exist. Life insurance is defined as a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person (Wikipedia, 2012). This essay will focus on the causes and effects of the problem. After considering the causes and effects, some possible solutions will be suggested so as to counter these causes.

The most significant cause of this problem may be economic downturn in recent years. Many family's finances are in a precarious period. People cannot afford life insurance because they are concerned more with the ability to pay mortgage and other bills. Incorrect awareness and inadequate knowledge about life insurance have also contributed to this problem. A recent LIMRA (2012) study found that many customers over estimate the cost of life insurance by as much as three times. Besides over estimating the cost, some customers said that they are afraid to make wrong decision without enough information. Facing competitions from other financial sectors could be another cause for the problem. With the development of whole financial market, customers have more products chosen to manage their money. Although increased competition may result in improvement in business efficiency, many companies still maintain inefficiency operation and will be unsustainable in the long run.

The major effect of this problem is that agents who cannot get enough commissions from selling life insurance may resign the jobs. Insurance companies are different from other companies in terms of its unique agent-customer relationships. If the number of customers decreases, the capacity of life insurance companies to support their agents is limited. The left agents may require higher commission rate, which would result in higher cost in operating business. Finding and training new agents would cost a lot and be a long way to go. Some companies are possible to shut down business. Drop in overall coverage could trigger companies to cut in some services. They may cut back on the services customers expect to have, such as