Changing how Black Americans use life insurance could help shrink the racial wealth gap

Black Americans are more likely to carry life insurance than the average American, but their coverage does little more than provide for funeral costs.

Fifty-six percent of Black Americans have life insurance, according to a study by LIMRA and Life Happens, compared with 52% of all Americans. But 46% remain underinsured, with their benefits not enough to replace income, offer cash value options during life, or provide wealth transfers across generations.

More coverage could help close the racial wealth gap, some experts said, but many Black Americans are missing out because of financial concerns, a misunderstanding of how life insurance works, and mistrust of the industry at large.

“What I hear is, ‘My parents didn't help me, so I'm just going to bury myself’…[leaving] every generation starting over, unlike other communities where they're giving legacy to the next generation,” Wendy Edwards, a financial services professional with over 30 years of experience representing New York Life and other insurers, told Yahoo Money. “Instead, we have a financial loss and an emotional loss creating a recipe for disaster.”

Fifty-six percent of Black Americans have life insurance, according to a study by LIMRA and Life Happens, compared with 52% of all Americans. (Photo: Getty Images)

'It's simple math'

Just like insuring a car or home, life insurance protects an individual’s income potential, providing their family with a financial legacy if something happens to them.

The rule of thumb is to have 10 times your annual income in life insurance, according to insurance nonprofit Life Happens, to cover expenses beyond the funeral like housing, mortgage, childcare, health care, and education, so your family won’t be go into debt.

Even if you only make $40,000 a year and work at least 35 years, your human capital would be $1.4 million, according to Edwards. But many Black Americans aren’t accounting that way and therefore pass along smaller windfalls to their heirs.

Federal Reserve Board 2019 Survey of Consumer Finances

Only 10% of Black families receive a wealth transfer, versus 46% of white families, according to one 2014 study. The median transfer for Black families who do get an inheritance is $52,240, or 60% of the median transfer for white households, which is $83,692.

Learn more @Yahoo News