Protection support: a joint effort of insurers, governments and employers is needed to bridge the gap in mortality protection that leaves millions of people vulnerable and society responsible.

Mortality protection, the core life insurance product, is greatly lacking in many American homes. According to a recent Swiss Re study of five industrialized countries, the United States has the greatest gap in mortality protection at $10.5 trillion. The "mortality protection gap" represents the difference between the resources available after the death of the primary wage earner (essentially Social Security payments, financial assets and the proceeds of any existing life insurance cover) and the resources actually needed by the surviving dependents in terms of income replacement and debt repayments.

The situation is not restricted to the United States. According to Swiss Re's study, significant mortality protection gaps also exist in such markets as Australia, Germany, Italy and Taiwan. To close this gap, there would need to be a manifold increase in sales of individual term life insurance products in these countries--a signal of the huge growth potential for such products. (See "Mortality Protection Gaps in Five Key Markets, 2002," on page 63.)

Insurers, employers and governments can join forces providing for dependents if the primary wage earner dies.

About the U.S. Gap

Estimates of the U.S. mortality protection gap build on data from four external sources: the Census Bureau, the Survey of Consumer Finances conducted by the Federal Reserve Board, the Social Security Administration and Limra International.

Ideally, the protection gap should be measured family by family. This approach is not feasible, however, because the available data are highly aggregated, with no sensible way to match up the relevant information from the various sources. Instead, Swiss Re's researchers considered different groups, as defined by the primary earner's age, enabling a profile of families in each age bracket to be developed.

To illustrate the analysis based on age-group averages, consider U.S. families whose primary earner is between 35 and 44 years old. (See "U.S. Mortality Protection Gap by Age Bands," column 3, above.) These families have an average income of $77,100, roughly 60% of which must be replaced in case of death. Social Security survivor benefits would provide $18,500 a year, filling some of the gap, yet the total protection needed at the time of death would still be a sizable $596,900.

Household financial assets and existing life insurance coverage go toward addressing this need, but families in this age group still face an average estimated protection gap of $352,500. All told, some 18.8 million households in this age band have an aggregate protection gap of $6.6 trillion (18.8 million x $352,500). Similar calculations for families with primary earners trader 35 and aged 45-54 yield protection gaps of $2.4 trillion and $1.5 trillion, respectively. The youngest families have less of a gap than the 35-44-year-olds because they have less income to replace. The 45-54 demographic group has less of a gap than the 35-44-year-olds because it has fewer years until retirement, more assets and more life insurance.

Adding the three age-groups together produces an estimated U.S. mortality protection gap of $10.5 trillion.

As a percentage of total protection needed, the protection gaps are within a reasonably similar band across the countries examined, varying from a low of 24% in Taiwan and Italy to a high of 39% in Australia.

Another statistic shows that the risk-premium ratio (the proportion of total life premiums collected for all risk-protection products that pay out for a specific event such as death, inability to work, critical illness or long-term care) fell in the second half of the 1990s, and in 2003 had stabilized at 15%. In the same year, mortality cover made up 78% of risk premiums, representing just under 12% (78% of 15% risk premiums) of global life insurance premiums. A look at real growth between 1995 and 2003 shows that premiums for mortality protection grew annually by just 2.1%, compared with total life insurance premium growth of 3.9%. (See "Global Risk-Premium Growth," page 65.) This low growth can in part be attributed to falling premium rates for risk products, which is evidenced in statistics from the United States and the United Kingdom. A further factor was strong demand for tax-deductible single-premium products, which offer little or no mortality protection, during the global stock market boom.

As "Components of Mortality Protection by Country" on page 65 shows, Social Security benefits cover only a small proportion of a household's actual mortality protection needs. The amount of cover is often determined by the length of time Social Security contributions have been paid and, therefore, the period of time the worker has been gainfully employed, which is why young workers in particular tend to overestimate the level of benefits to which they are entitled. To make it clearer for consumers to gauge their protection needs, there are potential benefits in having private and state insurance providers agree on common information standards. This would make it possible to compile an overview, on an annual basis at least, of existing mortality protection from group, individual and social insurance cover.

The Need to Know

The amount of mortality cover needed by a household is governed by the family's individual need for protection. Generally, the aim is to replace the income and meet the debt obligations of the primary earner such that the dependents are able to maintain their standard of living. Calculating the optimum amount of mortality cover is complicated, however, one reason being--as mentioned above--that it is difficult to obtain information on existing protection. Personal advice from an insurer or agent is often essential.

One way of resolving this issue could be to provide information in the workplace. Social Security providers, private insurers and/or employer associations could develop guidelines and information about existing and optional mortality protection that could be disseminated at special events in the workplace at little administrative expense.

Good opportunity exists for workplace education about mortality protection needs, combined with growth in the use of the workplace as a distribution channel. Most mortality protection products are sold face-to-face through affiliated and independent agents. People typically do not take initiative to seek this kind of advice on their own. Given that a significant amount of planning for retirement and other benefits is already handled through the workplace in the United States, the potential exists to expand this channel into mortality-protection products. Even with increased educational and promotional efforts for these products, however, employers' and employees' priorities likely will remain with the rising costs of health-care and related benefits. Realizing this situation should not deter goals to highlight mortality protection needs, but helps to manage workplace perspectives.

Government can contribute to lowering the sales cost of term life cover by several means. In the United States, the government could build on the success of the existing 401(k) plans, with the integration of a minimum level of basic mortality term protection with additional optional protection available for employees. It could also ensure tax breaks for risk premiums. France, for example, affords special tax advantages for employer contributions to employee risk protection (mortality cover, inability to work and other risk covers).

Beyond the workplace, the industry also needs to learn to sell mortality protection better and to improve dialogues with consumers about their protection needs. The basic financial needs of many families remain un-addressed, with the young and the less affluent particularly vulnerable to a drastic decline in living standards in the event of the primary wage earner's death. According to an estimate from the National Bureau of Economic Research, in the event of a spouse's death, nearly one-third of secondary earners between the ages of 22 and 39 would suffer at least a 40% decline in the standard of living. "A Bigger Problem Than Statistics Show" on page 64 discusses this issue in greater detail.

The Need to Intervene

Inadequate mortality protection causes genuine, widespread hardship. According to The Economics of Aging, edited by David Wise, the poverty rate of widowed women in the United States rose from 9% to 42% over the two years after their husbands died. Adequate insurance could have prevented much of this poverty. Shrinking the protection gap is sound public policy that will improve the quality of life for many individuals.

Aside from the question of compassion, two economic arguments also call for intervention. First, when individuals are underinsured, it creates a so-called "negative externality"--an uncompensated cost borne by others. An example of a negative externality is when a manufacturer pollutes, creating an external cost--the harm caused by the pollution--borne by the people living nearby. The deaths of underinsured wage earners may cause their dependents to require public assistance, a cost borne by taxpayers. Reducing the protection gap therefore benefits society at large.

Second, as previously noted, many families with extensive insurance needs hold little or no mortality protection. Consumer education and policy intervention could lead to better, more informed choices.

Nobody likes to talk about death, nor its consequences for surviving dependents. However, life insurers, banks, employers and, not least, the state, must join forces to make the population aware that it has a genuine need for adequate mortality protection and to ensure that the right economic and fiscal conditions exist for affordable cover to be distributed to consumers. Such a combined push toward closing the mortality protection gap will be to the benefit of individuals and society as a whole.

Key Points

* In 2003, mortality cover made up 78% of risk premiums, representing just under 12% of global life insurance premiums.

* Social Security providers, private insurers and/or employer associations could develop guidelines and information about existing and optional mortality protection that could be disseminated in the workplace.

* Government can contribute to lowering the sales cost of term life cover by several means.

Contributor Milka Kirova is an economist in Swiss Re's Economic Research & Consulting unit in New York.

A Bigger Problem Than Statistics Show

A closer look reveals a bigger U.S. mortality protection gap than shown by the average-basis calculation. The analysis shown in the main article, which looks at averages instead of the financial situations of individual families, understates the tree magnitude of the protection gap. To see why, consider the financial asset holdings of households headed by people aged 35-44. (See "U.S. Mortality Protection Gap by Age Bands," column 3, on page 63.)

The first method assumes that each family has $106,200 in financial assets--the average for the group. Yet in reality, more than 80% of families have less than this amount. Indeed, a third have less than $5,000 in financial assets, and 7% have none at all. Holdings of mortality protection, though more equally distributed, still vary widely. Three-quarters of the families hold mortality protection below the average level of $267,000. Nearly one in five hold no mortality protection at all. The proportions of households headed by 35-44-year-olds with no financial assets (6.7%) and no insurance (18%) are reported in studies conducted by the Federal Reserve Board and by Limra International.

How can a large majority of families be below average by these measures? The reason is that the distributions of asset and insurance holdings are skewed. A relatively few families have holdings (not depicted in the figures) that are quite high, boosting the averages. Because some of their assets and insurance holdings are not needed to fill a protection gap, treating average holdings as representative of all families overstates the resources available society-wide and understates the actual protection gap.

Measuring the protection gap by taking account of the distributions of asset and insurance holdings within each age group yields higher estimates for each age cohort, especially the age 45-54 population segment. (See "U.S. Mortality Protection Gap by Age Bands," column 4, on page 63.) The total gap estimated ha this way is $18.6 trillion, as opposed to $10.5 trillion for the averages-based approach. The essential message is the same: Millions of U.S. families are either uninsured or substantially underinsured.

Mortality Protection Gaps in Five Key Markets, 2002

                                         Australia   German   Italy

Gap in US illions of sums insured        4474        $2,662   $640
Gap in % of total protection needed      39%         36%      24%
Gap in % of GDP                          121%        120%     49%
Gap in US$ billions of annual
  term premium,                          $1.2        $6.6     $1.6
Gap in % of existing annual individual
term premium                             109%        286%     611%
Missing annual premium, % of GDP         0.30%       0.30%    0.12%

                                         Taiwan   United States *

Gap in US illions of sums insured        $234     $10,576
Gap in % of total protection needed      24%      29%
Gap in % of GDP                          83%      105%
Gap in US$ billions of annual
  term premium,                          50.6     $23.2
Gap in % of existing annual individual
term premium                             n/a      104%
Missing annual premium, % of GDP         0.21%    0.23%

U.S. figures refer to 2001

Source: Swiss Re

U.S. Mortality Protection Gap by Age Bands

Protection needed is computed as (household income x household income
multiplier)-(annual Social Security benefits x Social Security
multiplier). It is before accounting for assets and liabilities. Totals
are rounded. (US $)

Age of Primary Earner                     Under 35        35-44

Household income                           $44,200      $77,100
Household income multiplier                   13.9         11.5
Social Security survivor benefits          $17,200      $18,500
Social Security multiplier                    20.3         15.9

Protection needed                         $266,200     $596,900

0.5 x Financial assets                     $22,100      $53,100
Debt                                       $48,500      $75,800

Protection needed, net of financial
assets and debt                           $289,900     $619,500

Life insurance coverage                   $145,500     $352,500

Protection gap                            $144,500     $352,500

Number of households                     16,832,000   18,818,000
Aggregate protection gap,                     $2.4         $6.6
  (US$ Trillions)
Aggregate protection gap, allowing for
unequal wealth and coverage,                  $3.9         $9.3
  (US$ Trillions)

Age of Primary Earner                       45-54         Total

Household income                           $93,200
Household income multiplier                    6.3
Social Security survivor benefits          $14,100
Social Security multiplier                    10.2

Protection needed                         $439,800

0.5 x Financial assets                    $114,350
Debt                                       475,600

Protection needed, net of financial
assets and debt                           $401,100

Life insurance coverage                   $309,700

Protection gap                             $91,400
Number of households                     16,540,000
Aggregate protection gap,                     $1.5        $10.5
  (US$ Trillions)
Aggregate protection gap, allowing for
unequal wealth and coverage,                 $5.40        $18.6
  (US$ Trillions)

Sources: Census Bureau; Federal Reserve Bulletin; Limra International;
Social Security Administration; and estimates by Swiss Re Economic
Research & Consulting.

Components of Mortality
Protection Requires
By Country * (2002)

(US $ Thousands)
                                                           United
                    Australia   Germany   Italy   Taiwan   States

Protection gap       100         144       56       39      124
Life Insurance       117         143       91       18      161
Social Security
  benefits            72          33       66      147
Assets available      38          42       54       39       38

Note: Requirements are for an average worker with dependents.

* For the sake of consistency, U.S. data are
translated on a per capita basis based on a 2002
estimate that 78% of salaried employees live as
dual-earner couples. U.S. data is for 2001.

Source: Swiss Re, Family and Work Institute