By Elizabeth Renter
Life can be expensive, and many of us are forced to decide between wants and needs -- or, when money is tight, between needs and needs. Term life insurance is one of those expenses that many view as optional, even though a new study shows that Americans greatly overestimate the cost of this coverage.
Some 64% of consumers cited cost as a barrier to buying life insurance, according to the 2016 Insurance Barometer Study from Life Happens and LIMRA, two organizations connected to the insurance industry. For this reason and others, the study says, 40% of those polled choose to go without.
Affordability is a reasonable concern, but in each of the five years it's been produced, the study has also found Americans consistently overestimate the cost of term life insurance.
The real cost of term life insurance
How much you'll pay for life insurance depends on a variety of factors, including the amount of coverage, the term or number of years the policy will be in force, your age and health, and other lifestyle factors.
Generally, a healthy, nonsmoking 45-year old who qualifies for standard rates can get a 20-year, $500,000 term life insurance policy for $600 a year, according to a NerdWallet analysis. The healthier and younger you are, the less life insurance costs.
The perceived cost of term life insurance
The latest Insurance Barometer Study shows that consumers overestimate yearly premiums by more than 200%, on average, something Marvin Feldman, Life Happen's president and CEO, says continues to surprise him each year the report is released.
"Instead of researching, which is pretty easy to do, to find what is appropriate for them, people are just making an assumption that life insurance is too expensive and going without," he says.
Respondents were asked to estimate the annual premium on a $250,000, 20-year term life insurance policy for a nonsmoking 30-year-old. The actual cost of the policy was $160, but the median estimate was $400. Consumers younger than 30, who would likely pay even less than the model policy, overestimated the cost even more, guessing it was about $500.
When life insurance is right for you
Cost isn't the only concern that keeps people from purchasing life insurance. Many don't understand why they would need it in the first place.
In the event of your death, your policy can cover costs your loved ones would have to manage if you didn't have significant savings in place. It can replace your income, cover your debts, pay funeral costs, send your child to college or be a generous inheritance.
Life insurance isn't for everyone. For example, the independently wealthy or those with grown children don't need it. Younger people with no dependents or debt don't ordinarily need it, either. Deciding to purchase life insurance is a personal decision, of course, but one that should be well informed.
"You're talking about an event that people don't really want to discuss, and that's dying," Feldman says. "They have to understand, though, that if they love someone or owe someone, insurance is absolutely appropriate for them to have."
Elizabeth Renter is a staff writer at NerdWallet, a personal finance website. Email: elizabeth@nerdwallet.com. Twitter: @ElizabethRenter.