African-Americans place greater value on life insurance
February 5, 2016 by BARBARA MARQUAND
Lazetta Rainey Braxton remembers when she was a child growing up in South Hill, Virginia, and insurance agents went door to door in African-American communities selling life insurance to cover burial expenses. The small policies gave people like her parents and grandparents the security of knowing they’d be buried with dignity and that their families wouldn’t be burdened by funeral expenses.
“Insurance agents were trusted in our community,” she says. “They made my parents and grandparents feel valued.”
That history of trust may be one reason the rate of life insurance ownership is higher among African-Americans than for the general population, says Braxton, CEO of Financial Fountains, a fee-only financial planning firm in Baltimore, and president of the Association of African American Financial Advisors.
About 60% of “middle-market” African-American adults own individual life insurance, compared to 46% of the general middle-market population, according to industry group LIMRA. The middle market includes adults ages 25 to 64 with household incomes of $35,000 to $100,000. Additionally, about 7 in 10 middle-income African-Americans strongly agree that most people need life insurance, compared to about half of the general population.
Familiar and safe
Another reason for the high rate of ownership among African-Americans may also stem from a lack of access to other investment products years ago.
“Life insurance was an additional savings vehicle beyond the bank for African-Americans when they didn’t have access to brokerage houses,” says Nicolas Troy Abrams, a financial planner and independent insurance agent in Columbia, Maryland, and Washington, D.C., and AAAFA secretary.
As a result, life insurance has been a familiar product for generations of African-American families and may seem more tangible and safe than stocks, Braxton says.
The relatively high rate of life insurance ownership is a good thing, says Cliff Wilson, board chairman of insurance industry group Life Happens. But it still means that 40% of middle-income African-Americans do not own individual life insurance, he notes.
And among those who do have coverage, some may be underinsured.
Financial planner James Brewer, president of Envision Wealth Planning in Chicago and AAAFA vice president, says he often meets new clients who own small life insurance policies to cover their funerals but lack coverage that would replace their income for their families if they died prematurely.
“What I tell clients is, ‘If you have only enough life insurance to bury you, then your family is going to be buried when you’re gone,” says Delvin Joyce, managing director of Prudential Financial’s South Florida agency office in West Palm Beach. Joyce and other African-American advisors work with community organizations such as the National Coalition of 100 Black Women to educate consumers about personal finance.
The next generation
A 2015-2016 Prudential study showed that 58% of African-Americans expect the next generation of their families to have a better financial situation than their own, compared to 46% of the general population.
“Life insurance is one of the best ways to put some action behind the optimism and leave a legacy to the next generation,” Joyce says.
The Prudential study also showed a gap in access to financial advisors. About 10% of African-Americans reported working with a financial professional, versus 26% of the general population. To help close the gap, Prudential is working with community and faith-based groups to deliver financial education in diverse communities.
Addressing the lack of diversity among financial professionals is also key, Abrams says.
Getting enough life insurance
Financial advisors generally recommend that adults buy enough term life insurance to cover them during their earning years, while they’re paying off mortgages and saving for kids’ college tuition. Term life covers you for a certain period, such as 10, 20 or 30 years, and pays a death benefit to your beneficiary if you die within the term. The coverage is cheap. The annual premium for $500,000 of coverage for 20 years is around $245 for a healthy 30-year-old man and about $215 for a healthy 30-year-old woman, according to NerdWallet research.
Permanent life insurance, such as whole or universal life, is much more costly because it covers you for your whole life and includes a savings component called cash value. The policy owner can borrow against the cash or surrender the policy for the money.
Most term life policies are convertible to permanent life insurance. Brewer says he recommends clients buy enough term life insurance to replace income and pay off debts in case of premature death and consider converting some of the coverage to permanent life insurance later if it’s needed for estate planning or if clients want to pass money on to the next generation.
Like other fee-only financial planners, Braxton doesn’t earn commissions on products such as life insurance. She helps clients clarify financial goals and provides the tools and education to meet them. It’s a much more holistic approach than the advice those door-to-door life insurance agents gave years ago. Yet much can be learned, she says, from how those agents made her parents and grandparents feel understood and valued.
Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @barbaramarquand.