Why some places are bigger on life insurance

A Bankrate survey of life insurance statistics found that the three states with the highest marriage rates -- Utah, Idaho and Wyoming -- are not the top states for life insurance coverage. We identified the life insurance leaders by dividing the numbers of life insurance policies in force in each state by population.
However, factors other than marriage rates probably have a bigger impact on life insurance coverage, says Lisa Gardner, associate professor of statistics and insurance at Drake University in Des Moines, Iowa. She outlines her thoughts in the interview below.

We compared the latest insurance industry statistics with the U.S. census data on marriage and found that the top states for tying the knot -- Utah, Idaho and Wyoming -- are not the top states for life insurance. In your opinion, why is this?

I prefer using measures that include benefits payable or premium volume because they reflect the economic significance of life insurance. So I want to raise the question of whether you are using the right measures to consider the importance of life insurance.

Let's consider how differences in policy benefit amounts could affect the number of policies sold. In the South and, to a lesser extent, the Midwest, a form of low-face-amount life insurance called industrial life insurance was very popular during part of the last century. Also called debit policies, these policies were sold door-to-door and required a small weekly or monthly premium payment to remain in force. The policies provided an affordable option for many lower-income folks who might not otherwise be able to afford life insurance. The face amounts varied but were typically low. (Less than $10,000 was normal.)

In order to get enough coverage, a policy owner might need to purchase more than one policy. In fact, it was not unusual for a policy owner to have more than one debit policy. Hence, one might observe higher-than-normal numbers of policies in force per capita in the states where industrial life insurance was widely sold. That does not mean that life insurance is more economically important in these locations. One can own, say, two low-death-benefit policies, (such as) $5,000 death benefits, and have considerably less protection than if one owns a single $50,000 death-benefit policy.

What it means is that benefit amounts help explain how many policies get sold. Industrial life insurance policies were not sold much, if at all, in places like Wyoming, Utah and Idaho. They were sold widely in the South and Midwest.

Besides differences in face amounts, another reason why states might have different numbers of policies in force per capita is because of population per square mile. The states of Idaho, Utah and Wyoming are very large states, among the 15 largest in the country. They are also among the 10 least densely populated. If a person wants to make a living selling (a) life insurance product, it is a very good idea to live around other people, and lots of them.

Life insurance is a voluntary policy, meaning that there are no state laws that require one to purchase it or something similar (unlike, say, auto liability insurance). When approached, most people will not want to talk about life insurance. Of those who do, few will actually purchase a policy. In a place like Wyoming, a state with fewer than 600,000 people spread out over almost 100,000 square miles, one might have to drive a lot of miles to make a living as a life insurance agent. Thus, I would expect fewer policies to be sold in Wyoming simply because it is harder to find people to insure.

The prospects for selling life insurance seem a little more hopeful in Idaho and Utah, with a few more densely populated urban areas found in each, and of course, with Salt Lake City dominating the population of Utah. Still, one has to consider whether a lower number of life insurance agents per capita helps explain lower numbers of policies sold per capita in these states as opposed to some others.

A state might have a lower number of life insurance policies in force simply because more lives are insured under group term insurance contracts, often offered by employers. Nearly 40 percent of the life insurance in force in the U.S. is through group term insurance, often provided by employers. A single contract between an employer (the policy owner) and an insurance company may cover hundreds, if not thousands, of employees' lives. Sometimes the dependents of employees, like their spouses and children, are covered under these contracts, too.

So a single contract does not equate to coverage for a single life but instead to coverage for many lives. States where group term insurance covers more lives will likely have lower policy counts, everything else the same. That doesn't mean that life insurance is less important in that state. But it does help explain why more policies may be in force in some states than others.

Average household sizes could also explain differences in the number of policies in force. Utahans have larger-than-average household sizes because they tend to have more children. Minors usually don't buy life insurance, and so it would make sense that where minors are more prevalent, fewer policies get sold, everything else (being) the same.

So I have offered four possible explanations as to why the number of policies sold per capita might vary among the states, including some explanations that are specific to the states of Idaho, Utah and Wyoming. There are also other possible explanations, too, that I (won't get into) now.

Your finding that the three states with the highest marriage rates do not have the highest number of policies in force probably speaks more to differences in marketing systems (influenced by incomes and geography) than it does to anything having to do with marriage. It also seems possible that differences in group term coverage rates and average household size (the last item for Utah only) affect policy counts per capita.
Besides being the states with the highest marriage rates, Utah, Idaho and Wyoming are also the states with the youngest median ages at which women first marry. Do you believe that young married couples should not worry about life insurance until later in their lives?

No. Life insurance provides money when the insured dies. There are many reasons why a young spouse might need this money, including to pay for burial expenses, living expenses and the costs of raising children, for example.

In the state of Utah, couples not only get married at a younger age than the norm, but they also start having children at younger ages than the norm and have larger families. Because they have not been in the workforce for many years, they haven't had much time to build up a nest egg to provide for (their) loved ones when they die.
So many young married couples in these states really do need a product like life insurance or a rich relative who is going to give their survivors a lot of money when they die.

Alabama, Louisiana and Mississippi are the top three states with the highest policies-to-population ratio. Why is life insurance more popular in the South than in the rest of the states?

I think the debit insurance system helps explain part of the differences, as does population density. I also think savings rates probably have something to do with it. Median incomes in Alabama, Louisiana and Mississippi are much, much lower than those in Utah, Wyoming and Idaho. This means that the share of folks with significant savings in the three Southern states mentioned is probably a good bit smaller than the share of people with significant savings in the three Western states noted. Life insurance death benefits are a substitute for savings. If a person has enough money saved to provide for their loved ones, then some say they don't need life insurance.

Another theory is that Southerners value their families more than others. I have lived in Wyoming and I have lived in Georgia, and I was raised in Iowa. I do not believe that family is any more or less important to anyone simply because of the state in which they were raised. Taking care of your loved ones is a value held all over this country. In the right circumstances, life insurance can help you do just that.