A recent study shows an alarming number of Americans would have little to no money in savings to fall back on in the event of a financial crisis, underscoring the importance of a term life insurance policy for tough times.
The financial website Bankrate.com released its latest monthly assessment of Americans' savings health, known as the Financial Security Index. The June survey revealed few Americans have funds readily available if something were to go wrong, while others also express concerns with their job security and are becoming less confident about the health of their savings accounts.
Bankrate asked respondents how much money they had in checking, savings and money market accounts. The results showed 24 percent had no savings at all, a percentage that represents roughly 75 million Americans, said the report. Twenty-two percent said they had enough to cover expenses for less than three months and an additional 22 percent said they had three to six months worth in savings. Another 24 percent said they have enough for six months or more, while 8 percent said they weren't sure.
A lack of savings was particularly prominent among younger generations. Of respondents who were between 18 and 29 years old, 35 percent said they had no savings while 28 percent said they three months worth or less. Only about 10 percent had six months or more in savings, a standard some financial experts recommend when advising consumers on building their emergency savings.
"The majority of Americans still have much work to do in building an adequate emergency savings cushion," Greg McBride, Bankrate senior financial analyst. "Over 6 million people have been out of work longer than six months, yet only 24 percent of Americans have at least six months' expenses in an emergency fund. Those under age 30 and the lowest-income households were most likely to report having no emergency savings at all."
The report also asked respondents how they felt about their savings status now compared to a year ago. While 43 percent said they felt the same, 39 percent were less comfortable and only 16 percent were more comfortable.
Despite their precarious savings and debt situation, the report showed 53 percent of consumers feel no less concerned with their debt today than they did a year ago, while 26 percent say they've grown more comfortable with their situation. Experts said their improving attitudes might be a sign of complacency. Some consumers may have come to terms with their debt, making it less likely they'd seek a financial safety net like life insurance.
"The surprising thing, from my point of view, is that more people aren't uncomfortable," said Eddie Reece, a psychotherapist and expert on the psychology of money. "People often lack self-awareness, especially regarding issues that are so fraught with shame, which debt is. The vast majority of Americans have way too much debt, but [many who are in that situation have] been able to rationalize it in some way.
Frank Armstrong III, a financial expert, added some Americans felt their net worth had grown in the past 12 years, something that's just not possible considering the state of falling property values in the real estate market and still-high levels of delinquency among loans. It could be that some Americans have mistakenly assumed they're in better financial shape than they really are. The report showed roughly 74 percent of consumers felt their overall financial situation was either the same as it was a year ago or better. That was up from 71 percent who answered that way in May's survey.
Consumers looking to improve the health of their emergency savings have options, according to Bankrate. The process starts with identifying how much they'll actually need. Next, consumers should decide where they'll keep their extra funds - whether it be in a bank or special account. Bankrate recommends consumers envision their savings goal as a monthly bill, since that will increase the likelihood that they actually meet that responsibility each month and don't shirk saving.
Additionally, consumers need to commit to treating the emergency fund as just that - a place to keep money that's needed only for an emergency. Some cheat on that concept by pulling funds out of the account for unnecessary expenses, said Bankrate. In addition, the website said it may be best for consumers to start their savings goal small, putting aside a modest amount of money each month until their account has been built into something more significant.
A term life insurance policy can also be an important consideration for consumers preparing for an emergency. The policies ensure their family won't be without a critical income source after their death. However, the money in those accounts can often only be tapped if a policyholder passes away. Consumers who want to use a life insurance policy for its savings or investment capabilities may want to consider a whole life insurance policy. Their parameters can be more complicated and their premiums more expensive, and experts suggest consumers speak with an experienced financial planner on the advantages and disadvantages of such a policy before buying one.
Recent reports show more consumers may be taking the potential of life insurance as a safety net more seriously. Data from LIMRA showed the sales of combination life insurance increased 62 percent in 2010, which was the result of an increased demand for the long-term care benefits those policies can provide. With the cost of long-term healthcare increasing on a regular basis, many Americans appear willing to protect against those expenses with a life insurance policy, said the report.
"Consumers' growing desire for an alternative to stand-alone long term care insurance has driven sales of these products. For some buyers, combination products are a more affordable alternative to stand-alone LTCI," said Catherine Ho, LIMRA research actuary.
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