Insurance touches nearly every aspect of financial life, yet many Americans lack a clear understanding of how it works or why it matters. This article explores the drivers and consequences of insurance illiteracy and highlights the vital role actuaries can play in closing the gap through better product design, targeted education, and informed policy solutions.
By Sam Gutterman
Insurance is a risk-sharing system in which many contribute so that the system can provide benefits to offset the adverse financial effects of a peril experienced by a few. It is complex, containing intangible elements and sometimes significant limitations. It touches all aspects of our lives and is filled with promises, rights, and obligations. People often overlook or undervalue insurance; however it is a safety net that helps the insured navigate incidents where a covered loss occurs.
The system’s core component—risk pooling—is often underappreciated, especially in cities with downtown skyscrapers emblazoned with an insurer’s name. Although this can serve a public relations purpose, partly intended to convey an impression of financial strength, it can also give the impression that the insurer has substantial financial resources and influence and makes exorbitant profits. Still, this perception can obscure the fundamental risk-sharing benefits that insurance provides.
Insurance complexity and a reluctance to plan for the impact of specific hazards are among the reasons agents have traditionally played a key role, especially at the time of purchase, during life-cycle events when needs and responsibilities change, and when a covered loss occurs. This also underscores the need for consumer protection through enhanced insurance literacy and robust regulatory oversight, making insurance illiteracy a vital issue, which is the focus of this article.
What Is Insurance Illiteracy?
Insurance illiteracy is a subset of the broader issue of financial illiteracy. Balancing your checking account (for which I have never been especially successful) is important, just as knowing how to manage extra savings in your checking account or creating an annual household budget.
In contrast, a lack of insurance knowledge can lead to inadequate or inappropriate insurance coverage, which may result in devastating financial consequences. The insurance umbrella covers a wide range of insured events, including disability, a considerable health care expense, a lengthy unemployment patch, or even death; living past one’s life expectancy when you don’t have enough retirement savings; property damage, a business interruption, or a lawsuit; or an automobile accident, to name a few.
Despite its importance, it is the rare individual who reads their insurance policy before a claim occurs or fully considers the adverse consequences of having no or inadequate coverage. Imagine the thrill or frustration of reading an insurance policy—it is akin to reading a multi-page list of possible adverse medical consequences of a pharmaceutical prescription or a 400-page manual for your car. It also includes technical jargon and provisions that most people outside the insurance industry don’t understand. Does anyone voluntarily undertake such a task?
Insurance illiteracy is widespread and can significantly impact people’s long-term financial well-being and quality of life. Regardless, insurance is not adequately addressed, if at all, in schools. Although around 35 states require some form of personal financial education in high school, with some including insurance-related modules, the depth and quality of instruction can differ significantly by state and local school systems. These courses are often not thorough enough; some personal finance courses in high school offer only a cursory overview of insurance. It is not sufficient to study a list of available insurance coverages—engaging learning methods, including case studies, should be included to effectively communicate insurance risks to life that are memorable and hard to ignore.
The Roots of Insurance Illiteracy
In some cases, insurance is a product sold rather than sought out, particularly when it involves a hazard that few want to voluntarily fund or address without external pressure or examples, such as death, longevity, disability, or lawsuits. For example, about 40% of U.S. adults have indicated needing some or more life insurance. Other areas of insurance are similarly affected. So, what’s stopping people? A partial list follows:
- Inertia. While considerable uncertainty exists about pocketbook issues today, recognizing the need for insurance may not be top of mind, unless it’s required (for example, to obtain a driver’s license, attend a university, or secure a home mortgage).
- Convenience. The American public does not allocate enough time to become insurance-literate and current educational systems do not focus enough on life skills like insurance and its role within the broader financial literacy discussion.
- Affordability. There are numerous other demands on one’s paycheck or Social Security check. The risk is not small, as insurance companies are not in the business of charity; they need to be financially sound enough to fulfill their promises.
- Reputation. In some areas, insurance products and insurance companies have a bad rep. For example, a valuable insurance product for some could be a lifetime annuity, especially in the demise of defined benefit pension plans, but it has a very low take-up rate. Although it may offer a lower return than investing in a money market or a stock index fund, it has low commissions and includes longevity guarantees. Another example is the negative public perception of health insurers following the December 2024 shooting death of Brian Thompson, CEO of UnitedHealthcare.
- Different needs. People’s needs and priorities differ, making a one-size-fits-all approach inappropriate. Tailoring coverage to individual circumstances can be time-consuming and require considerable effort.
- Insurance illiteracy. A lack of insurance literacy can lead individuals to underestimate or fail to recognize insurance risks—for example, how much future income should be replaced in the event of death or disability, or the value to replace a home when considering homeowners insurance.
- Culture. There is a lack of practical and objective influencers, YouTube videos, and other accessible tools that could help popularize the topic and make it easier to identify insurance needs when a household forms or a business opens.
Most Misunderstood Elements of Insurance
Due to its complex nature, many aspects and terms of the insurance process can be confusing for those unfamiliar with it. Actuaries and others in the insurance industry can assume that terms such as coinsurance, co-pay, or renewal don’t need to be explained in plain English (of course, those whose first language is not English may have even more trouble with insurance lingo).
The following are some key areas where knowledge gaps commonly exist, which can vary considerably by type of insurance. They can lead to an inadequate understanding of the insurance product and its ability to meet a household’s insurance needs.
- Lack of understanding about basic insurance concepts and what value-for-money means in insurance, such as risk pooling, risk transfer, and the purpose of underwriting. And why insurance is necessary for an individual, family or a business.
- Misunderstanding the value of insurance, since just because one doesn’t have a claim for years doesn’t mean that the insurance had no value or was a waste.
- Lack of awareness of available products, such as renters’ insurance.
- Underestimating or overestimating the likelihood or financial impact of insurable risks, including life expectancy, frequency of disability or critical illness, property damage or theft, natural disasters, and long-term care needs. The common belief that “it won’t happen to me” reduces the incentive to buy appropriate coverage. Failing to align coverage with desired income, lifestyle, or financial goals can also affect insurance purchases.
- Confusion over how deductible amounts affect premium rates and coverage decisions, particularly for homeowners insurance, where coverage limits and exclusions can be critical.
- Lack of understanding of health insurance designfeatures, including out-of-network penalties, deductibles, co-pays, and coinsurance. For example, a 2024 survey by the National Association of Insurance Commissioners found that only 27% of Gen Z adults could correctly define “deductible,” and just 29% understood “co-pay,” highlighting a need to address significant lack of basic insurance knowledge. Also, when purchasing or renewing health insurance, numerous factors must be considered. Surprise claim denials can also arise unexpectedly.
- Uncertainty about pre-approval requirements for medical treatments or claims filing processes can be confusing and demanding.
- Confusion about which losses are not covered, including exclusions and waiting periods, such as flood exclusions. This often leads to poor product choices or claims issues.
- Inadequate insurance shopping and comparison practices, including assessment of the insurer’s financial soundness for a long-term contract and overreliance on an agent’s advice without independent research.
- Inadequate evaluation of an insurance agent or advisor’s qualifications, such as failing to confirm their licensing or insurance-specific education. Agents should clearly explain key features and limitations of policies in easy-to-understand language.
- Confusion between insurance and investments, such as whether a deferred annuity is a competitive investment, and how important guarantees are.
- Underestimating the cost of insurance relative to its value, leading to misconceptions about affordability.
- Lack of knowledge about consumer rights, such as free look periods and grievance redressal, can reduce a policy’s overall value. Appeals to the state’s insurance office can sometimes be valuable.
- Neglecting to review or update policies as life circumstances change, such as getting married, buying a new home, or having children.
- Not understanding renewal terms or the consequences of lapsed coverage can lead to gaps in protection.
- Negative perceptions of insurance based on denied claims, perceived profit margins of organizations, and potential misinformation promoted via social channels.
Who Needs Insurance and Insurance Literacy the Most?
Although the United States has one of the largest and most complex insurance markets globally in terms of premiums, its penetration growth is relatively mature and stable. Considering the needs that insurance can help address, its use falls short of expectations. And unsurprisingly, many of those in greatest need are also the most uninformed about the value of insurance and how it works. Certain population segments are particularly vulnerable to low insurance literacy and inadequate insurance coverage. The following groups face especially acute population segments with relatively low insurance literacy:
- Low-income households and those with limited academic backgrounds, who tend to be focused on immediate needs and may distrust financial institutions such as insurance companies.
- Young adults are usually reluctant to purchase insurance except when external mandates exist. They typically lack insurance knowledge. They typically lack knowledge of basic insurance concepts and believe they will not be affected by hazards covered by insurance.
- Older individuals, who may be more vulnerable to insurance scams or be sold inappropriate products.
- Residents of rural, inner-city, or other underserved areas, who have limited exposure to financial entities or licensed insurance agents.
- Immigrants and individuals whose first language is not English, who may not be familiar with the need for insurance or the range of insurance products available in the U.S.
- Gig and informal sector workers, who may be ineligible for employer-sponsored insurance and savings products and lack the steady income necessary to afford certain types of coverage.
- Self-employed individuals and small business owners, who may be focused on their daily operations and fail to recognize the importance of insuring business risks and liabilities.
- Household members newly responsible for managing financial decisions, such as those navigating divorce, or the death of a spouse or partner, who may not fully grasp the need for adequate insurance.
Although most examples of underinsurance involve inadequate insurance, overinsurance can also occur, where individuals pay for coverage they don’t need.
The Role of Actuaries
Actuaries can help provide the public with sound and objective information about insurance, ultimately benefiting the public as individual professionals and as members of the American Academy of Actuaries. They can contribute in several important ways. First, they can help develop products and processes that enable individuals, families, and businesses to meet their insurance needs cost-effectively. Second, they can volunteer and help educate various stakeholders about their needs and the limitations inherent in insurance coverage. These stakeholders include other insurance professionals, those involved in insurance distribution, as well as potential insureds and their families. Such efforts can improve insurance literacy and help close the insurance protection gap.
Actuaries play a vital role in the insurance industry by utilizing their expertise in mathematics, statistics, and financial theory to assess, quantify, and manage risks. They can significantly influence the design of insurance products, the calculation of premiums, and the financial soundness of insurance companies. In addition to their technical responsibilities, actuaries can help inform and educate the public about insurance and promote literacy by:
- Emphasizing fundamental insurance principles, including the concept of risk pooling.
- Assisting in content development for public interest campaigns targeting consumers, students, and other stakeholders.
- Promoting deeper insurance knowledge in schools and supporting continuing adult education.
Addressing insurance protection gaps requires a multifaceted approach, including policy reforms, public education, and innovative insurance solutions tailored to the evolving needs of diverse populations. Actuaries can help promote insurance literacy to the public by leveraging their expertise in risk, finance, and insurance mechanisms. Here are some examples of how they can contribute meaningfully:
- Developing educational content, either individually or in collaboration with other actuaries or insurance professionals.
- Translating complex insurance concepts into accessible language is more likely to be read and understood, including both insurance terminology and product provisions.
- Advising policymakers or regulators on the design of local or state insurance literacy campaigns that use brief, understandable descriptions in everyday language.
- Promoting transparency in product design, advertising material, and sales illustrations to help consumers, whether insurance-illiterate or not.
- Analyzing insurance protection gaps, identifying areas where misunderstandings are most likely, and helping to design marketing efforts tailored to those populations.
- Partnering with actuarial associations, public interest organizations, or insurance regulators to launch effective educational initiatives.
Closing the insurance literacy gap is crucial for enhancing financial resilience and well-being. Here are several practical suggestions for helping to close those gaps, aimed at different players such as insurance professionals, educators, and supervisory staff:
- Simplifying language in policy documents and marketing materials, and clearly outlining key features that may benefit a broad range of people. This includes using infographics or videos to explain coverage and illustrate some of the odds of incurring a loss.
- Including insurance education in schools, training teachers about insurance, and integrating the topic into financial literacy curricula—along with case studies that explore insurance risk, probability, and loss management.
- Increasing public awareness through regular (possibly multilingual) articles in local or national newspapers, social media, or by becoming influencers. This effort can also include designing mobile apps, games, or modules for online or in-person educational courses.
- Empowering agents and advisors to educate local communities and businesses through video or other accessible tools that explain risks and insurance concepts in simple terms, especially for audiences with limited time or education.
- Providing transparent comparison and advice tools through workshops or online platforms, sponsored by insurers or educators, and by partnering with schools or employers.
- Developing convenient and easy-to-read guides on topics such as why and how much insurance to buy, how to file a claim, and common mistakes to avoid.
- Designing products with varying levels of insurance literacy in mind, using focus group testing to ensure they support sound, informed decision making.
The Path Forward
Although a multidisciplinary approach will likely be most effective in addressing the issues discussed in this article, actuaries can play a critical role in improving insurance literacy, informing the public, and reducing protection gaps. This may include supporting policy reforms, improving public education, and developing innovative insurance solutions tailored to the evolving needs of diverse populations. Planning efforts should focus on identifying new customer sources and designing insurance products that align with their needs—a shared objective for actuaries, insurance professionals, and insurers.
Since affordability is a key factor in improving penetration, actuaries should identify and assess ways to provide insurance at the lowest possible price, which may include increased digital services, while still meeting the needs of a diverse population. Better financial literacy will reduce insurance gaps and increase sales for underserved populations.
Sam Gutterman is chairperson of the Social Security Committee and a member of the Retirement Practice Council.
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Observations on Major Insurance Products
Providing a comprehensive overview of insurance product literacy needs is challenging, as coverages vary widely. Nevertheless, it may be helpful to go over some key areas.
- Life Insurance. How much life insurance is needed? What role does life insurance play in financial and tax planning? What should be done near life cycle events that change the need for life insurance? When is one too young or too old for life insurance? What’s the right mix between term and permanent coverage? These are some questions that every household should ask, but do they? I don’t have answers, partly because they depend on each individual’s situation and risk tolerance. However, the relevant versions of these questions must be addressed; trusted experts can help ensure that the right questions are asked and provide the tools to help answer them. In any case, life insurance penetration has declined, with the percentage of Americans who own life insurance falling from 63% in 2011 to 52% in 2023, indicating a growing coverage gap. One estimate suggests that around 100 million adults believe they need new or additional life insurance, with many overestimating the cost of term life insurance.
- Annuities. Although certain deferred annuities are attractive investment vehicles for those with savings to invest, the wide range of savings options makes consumer choice difficult. Given the common belief that mortality will continue to improve despite pandemics, immediate (lifetime) annuities should be more popular, partly due to their guarantees. However, the technical complexity of some investment annuities has increased to the point that even financially knowledgeable individuals may need to enhance their understanding. To address this, greater emphasis should be placed on improving overall financial literacy, particularly as a means of confronting the retirement planning crisis. This includes understanding the opportunities and risks associated with insurance products, personal savings, participation in employer-sponsored plans, and Social Security.
- Health Insurance. Although health insurance penetration is high, particularly due to the Affordable Care Act and Medicaid expansion, challenges persist, as health care costs continue to rise, reflected in increasing premiums and deductibles, partly due to an aging population. As the cost of future health and long-term care looms over individuals and government programs alike, understanding how premiums, co-pays, deductibles, networks, subsidies, and work requirements interact will become even more important and complex, whether an employee, gig worker, retiree, or dependent. Travel insurance is particularly problematic, as coverage is often more limited than expected.
- Property & Casualty Insurance. Homeowners, renters, and auto insurance remain essential. As premiums continue to rise in many areas, the cost of insurance coverage also increases, affecting family budgets. The protection gap is widening due to rising input costs, whether due to inflation in construction and repair, increasing exposure to natural disasters, or other factors. In some areas, limitations in coverage, from flooding loss to other technical issues, pose serious financial threats. These insurance coverages are becoming increasingly important amid the ongoing debate over deductibles versus premiums—and whether forgoing insurance is ever worth it—will remain especially relevant for those who lack insurance literacy.
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