Unemployment has risen this year, and the government shutdown could exacerbate these rates. The social safety net is often inadequate in such circumstances, which leaves families to rely on their current wealth to keep themselves afloat. Compounding these challenges to a family’s financial stability, the lack of a job restricts a person’s access to many sources of household credit. Combined, these dynamics put families under immense pressure.
Well-designed cash-value life insurance could help protect families in the event of job loss. The cash component of a life insurance product could help fill the gap caused by income loss or a family emergency. While most families do not have a cash value plan, among those that do, Black families are most likely to have a cash-value life insurance policy compared with other ethnic or racial groups. Given their historical financial vulnerability amid recessions, this tool could be a resource during future downturns. As the federal, state, and local policy environment rapidly evolves, the private sector can step in to improve access.
Cash-value life insurance as a savings vehicle during instability
The typical life insurance policy provides a payout to designated beneficiaries when the holder of the policy dies, known as a death benefit. However, specific life insurance products, known as cash-value life insurance, include a feature that allows the policyholder to build a savings account that can be accessed by them in the future or can be passed down to beneficiaries.
The life insurance premium on cash-value life insurance is typically higher than on policies like term life insurance that don’t have this cash component. However, the savings in the cash-value life insurance is invested in safe securities, such as US Department of the Treasury securities, to increase the value of the cash component and help families build their net worth. Unlike many loan products, the holder of the cash-value policy does not need a credit or employment check to access this cash. That said, withdrawing from the cash component will reduce the policy’s death benefit.
A popular alternative to cash-value life insurance is a lower-cost term life insurance policy, which provides the financial payout in the event of the policyholder’s death but without a cash component. Coupled with a diversified investment portfolio, term life insurance should provide a higher rate of return than that of a cash-value policy.
But cash-value life insurance offers some advantages. Although term life insurance provides a payout in the event of death, the death of the policyholder must occur within the “term” of the policy. For example, the term of term life insurance may be 30 years. If the policyholder passes outside of this period, the coverage amount is not paid to the policy’s beneficiaries. Although investment portfolios can deliver a higher return, the returns for most financial products are also subject to taxes. In most circumstances, neither the returns delivered by cash-value life insurance nor accessing the cash component incur taxes.
Racial disparities in recession resilience and policy ownership
A recession can be harder on Black families than white families. Historical evidence indicates that when the unemployment rate rises nationwide, it increases more for Black workers. In addition, Black families have a lower net worth and less liquid wealth that can be accessed quickly and easily.
Both liquidity and insurance can help a family overcome an economic shock. Although the typical Black family has less liquid wealth, on average, Black families are more likely to have life insurance, including cash-value life insurance.
However, Black holders of cash-value life insurance policies are less likely to have built up enough to overcome a typical emergency. These racial differences are persistent and reflect specific experiences faced by Black families. For example, Black workers are historically more likely to be unemployed compared with white workers. Research indicates Black workers are often the first fired as the business cycle weakens, contributing to broader measures of Black unemployment. This can be amplified by occupational segregation, which limits economic mobility and job security.
Ironically, the historical experiences that undermine Black Americans’ financial health are correlated with their higher rates of insurance policy ownership. Black families disproportionately use life insurance to address lack of financial stability, fund generational wealth, and cover final expenses, while navigating long-standing discrimination in access to financial services and pathways to financial stability and economic mobility.
Private sector and workplace solutions to expand access
Economic recessions can be painful for many families. Public policy often helps families who have lost their job by providing access to unemployment insurance (UI). UI is a joint state-federal program that provides temporary financial assistance to workers who are unemployed through no fault of their own. However, UI may not last for the duration of unemployment, and inflationary concerns may complicate renewals. As the social safety net provided by the federal government is reevaluated, private industry can help. Working together, the private sector can take several steps to help build resilience for workers and their families by supporting the growth of the cash-value component of life insurance or expanding its flexibility to address policyholder challenges:
The life insurance industry could collaborate with employers to design a benefit option for staff that includes the employer’s investment in cash-value life insurance policies, functioning as a matched investment similar to retirement accounts.
Employers could provide an option to pay for or subsidize additional features to the life insurance policy, known as riders. For example, an employer could pay for a rider that automatically waives the policy’s premium in the event of unemployment, preserving access to the policy and its cash component without requiring premium payments during job loss. A long-term care rider could also be funded to cover care costs when needed.
Cash-value life insurance could provide a lifeline for families experiencing economic distress. Each family’s financial situation differs, so understanding the trade-offs of accessing the cash component—including its implications for the coverage amount—is critical. Given the disproportionate ownership of cash-value life insurance policies among Black families and the shrinking safety net, it’s worthwhile for the private sector to explore its use amid this period of economic uncertainty.
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