Being smart with your finances means controlling every risk you can. Unfortunately, tough economic times have forced many people to make some hard decisions, and one step many cash-strapped families are taking to cut back on expenses could be putting their financial health at risk.

Life insurance and you
According to a recent study from the investment research company Limra, the number of households that own a life insurance policy has dropped to the lowest level in 50 years. Only 44% of households have individual life insurance. Even considering the possibility that some workers get employer-provided life insurance policies as an employee benefit, 30% of households have no life insurance coverage at all.

Families are choosing not to buy life insurance for a variety of reasons. The most obvious is that when you're trying to make ends meet, the easiest candidates for cost-cutting are expenses that don't provide any immediate tangible benefit. To many, insurance premiums look like money thrown down the drain -- and when all goes well and the coverage proves unnecessary, it's easy to see the hundreds or thousands of dollars you spent on premiums as a complete waste of money.

Big consequences
On the other hand, those who are deciding to give up life insurance coverage are often those who most need it. The study found that 40% of households with kids under 18 would have immediate problems covering daily expenses if the top income earner in the family were to die. An additional 30% would only have a few months' worth of cushion before financial problems would become dire.

For some, the need to pay today's bills overcomes those concerns. But perhaps more importantly, part of the reason why life insurance is becoming less popular comes from two things: the complexity of insurance and the way it is sold.

First, insurance policies are incredibly complicated. Typical policies take up dozens of pages and include lots of legal terminology ordinary people can't expect to understand. Even simple term policies can be difficult to comprehend; add in a bunch of optional features, and the challenge becomes well-nigh impossible for some to overcome.

Meanwhile, the sales model for life insurance presents a further problem. Commissions on more expensive products like whole-life policies are higher than what salespeople earn for a term policy. That reduces the incentive to sell term-life policies, even when they're the most affordable option for a household that's struggling to keep a balanced budget.

The other side of the coin
Meanwhile, the insurance companies that offer such policies are also facing financial challenges. Metlife (NYSE: MET), Manulife Financial (NYSE: MFC), and Prudential (NYSE: PRU) all suffered through several quarters of net losses at different points during and after 2008's financial crisis. Some smaller companies have been hit even harder; Phoenix Companies (NYSE: PNX) saw big losses in 2008 and 2009 and is only now starting to rebound.

The problems stem from a combination of factors. The investments that insurance companies make haven't performed very well. Meanwhile, many insurance companies offered guarantees to buyers protecting their principal. That forced several, including Hartford Financial (NYSE: HIG) and Lincoln National (NYSE: LNC), to take TARP money to shore up their finances.

When insurance companies struggle, they have a big incentive to focus on high-margin business. Sure, the term-life policies that many families need make them some profits, but given a choice, companies would prefer to sell more lucrative products like annuities.

What to do
What that means is that rather than expecting an insurance professional to sell you the right policy, you may need to do your own research in finding the best life insurance for your needs. If you stick with term life, you'll find that for many people, just a few hundred dollars per year can get you hundreds of thousands in life insurance protection -- enough to give your surviving family members a big financial cushion if something happens to you.

Everyone's making tough choices right now. But you can't afford to put your family's future at risk just to save a tiny amount now. After doing some research, you'll likely find that insurance protection is cheaper than you think -- and it's well worth the effort.

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