Financial literacy is one’s ability to understand the tools and concepts needed to make sound financial decisions. Often, this includes effective budgeting, saving, and investing but extends into income security. A lack of knowledge can inhibit consumers from protecting their income with products like life insurance and annuities.
LIMRA research finds a positive relationship between financial literacy and financial security:
- Nearly 4 in 10 consumers who are highly knowledgeable about annuities expressed interest in converting assets into guaranteed lifetime income.
- Sixty-seven percent of consumers who say they are “very” or “extremely knowledgeable” about life insurance own some form of a life policy.
The Journal of Financial Services Marketing 1 suggests that financial literacy leads to the ability to deal with financial emergencies. In other words, people feel confident handling financial difficulties when they have the knowledge and tools to face them.
Currently, 27% of consumers feel very or extremely knowledgeable about life insurance, according to the 2023 Insurance Barometer Study, a joint study by LIMRA and Life Happens. In addition, 30% of consumers admit they lack familiarity with annuities.
Without adequate knowledge, consumers may avoid buying insurance and annuities, leaving themselves at risk for financial hardship. For example, the belief that life insurance is “too expensive” is the top reason consumers cite for not having it (43%). Similarly, 55% of consumers think term life insurance is three times more expensive than it is.
Furthermore, only 21% of consumers correctly identified the statement, “Annuities are the only financial product that can create guaranteed lifetime income,” as true in a financial knowledge quiz.
The financial services industry, therefore, has an opportunity to educate more consumers about income protection products. Financial professionals can start by explaining how these products lead to financial confidence. LIMRA data shows that 69% of life insurance owners feel financially secure compared to 49% of non-owners, representing a 20-point difference.
Additionally, 56% of consumers with high annuity knowledge believe these products offer peace of mind compared to 18% of consumers with low annuity knowledge.
Next, financial professionals can demonstrate how life insurance and annuities work within an overall financial plan. According to 42% of insurance-focused financial professionals, clients need help understanding how insurance products fit with other financial products.
The industry should play a significant role in helping clients better understand life insurance and annuities. With this knowledge, clients can take the necessary steps to achieve financial security and peace of mind.
For more information, read LIMRA’s The Importance of Financial Literacy infographic, created for Financial Literacy Month.
1 Impact of Financial Literacy on Financial Well-Being: A Mediational Role of Financial Self-Efficacy, Journal of Financial Services Marketing, 2022.