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Published by the Consumer and Community Affairs Division Special Edition May 2008 IN THIS ISSUE Insurance and Asset Building page 1 Assets and Opportunity in the Midwest: A comprehensive look at the 7th District based on the CFED Scorecard page 13 Profitwise News and Views welcomes article proposals and comments from bankers, community organizations, and other readers. It is mailed (either electronically or via U.S. mail) at no charge to state member banks, financial holding companies, bank holding companies, government agencies, nonprofit organizations, academics, and community economic development professionals. You may submit comments, proposals, or request a subscription by writing to: Profitwise News and Views Consumer and Community Affairs Division Federal Reserve Bank of Chicago 230 South LaSalle Street Chicago, IL 60604-1413 or CCA-PUBS@chi.frb.org The material in Profitwise News and Views is not necessarily endorsed by and does not necessarily represent views of the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Chicago. © 2008 Federal Reserve Bank of Chicago Profitwise News and Views articles may be reproduced in whole or in part, provided the articles are not reproduced or distributed for commercial gain and provided the source is appropriately credited. Prior written permission must be obtained for any other reproduction, distribution, republication, or creation of derivative works of Profitwise News and Views articles. To request permission, please e-mail or write to the address indicated above. Advisor Alicia Williams Managing Editor Michael V. Berry Assistant Editor/Production Manager Mary Jo Cannistra Contributing Editor Jeremiah Boyle Compliance Editor Steven W. Kuehl Economic Research Editor Robin Newberger Economic Development Editor Harry Pestine Graphic Designer Katherine Ricca Visit the Web site of the Federal Reserve Bank of Chicago at: www.chicagofed.org CONSUMER ISSUES Insurance and Asset Building by Robin Newberger and Michelle Coussens I. Introduction This study explores the connections between insurance, wealth building/wealth preservation, and access to financial services (hereafter financial access) for low- and moderateincome consumers. It examines the needs, attitudes, and practices that these consumers have regarding insurance, and considers whether and how information or more direct access to insurance might complement the strategies and goals of organizations that help low-wealth consumers to build and protect their assets. Many of the same population groups who are less likely to use mainstream financial institutions are also less likely to have various types of insurance, although these populations may be particularly vulnerable to financial setbacks that could (potentially) be mitigated by insurance. While many studies have shown that lower-income consumers often have some savings and assets or are interested in building their savings and assets, little is known about their experience with insurance and how having insurance affects the acquisition or protection of assets. There are few published examples of how asset-development organizations provide information or services connected with insurance, while the descriptions of how insurers support asset development are also limited. A handful of organizations and researchers have recently begun to explore some of these questions. For example, the Center for Financial Services Innovation (2007) has called the relationship between insurance and asset building a fertile field for study. CFED, a nonprofit organization dedicated to expanding economic opportunity and alleviating poverty, found that attendees of its 2006 national Assets Learning Conference ranked the topics of health insurance and asset preservation as emerging priorities for the field. A number of experts in the asset development field, including Seidman (2006) and Barr (2007), are advocating for broader ways of thinking about the types of financial services that low- and moderate-income households need, in addition to accountbased products, to build and keep their assets. In this study, we examine the potential linkages between insurance coverage, asset development/asset preservation, and financial access based on a scan of the literature and responses from new focus groups convened on this topic. We explore the extent to which insurance helps lowerincome households manage (or avoid) financial crises, factors that impact the choice within the cohort to buy insurance or not, their understanding of and familiarity with insurance concepts, and insurance distribution channels. We hypothesize that: • More direct access to insurance and information about insurance would complement the strategies and goals of asset-development/preservation programs; • Households eligible for asset-development programs need insurance and want to know more about insurance; • Insurers may see participants in asset programs as a potential market for their products and, as such, draw insurers into the broader “assets” dialogue; and insurance to protect their assets and they would expect to use insurance industry sources to purchase policies in the future. We find less consensus around the idea of using a bank to obtain information or access to insurance products. However, the ways in which people often cope with their financial setbacks, namely by borrowing, underscores the connection between access to insurance and access to credit, and suggests that financial intermediaries may have a role in providing information or access to insurance to lower-income customers. The remainder of the study is organized into the following sections. Section II provides a brief overview of the asset-development field and its current treatment of insurance topics, as well as an overview of the insurance field’s support of asset-building strategies and community reinvestment. Section III uses national data sets to show coverage rates for various types of insurance. Section IV presents a scan of the literature related to asset development/preservation and insurance. Section V summarizes the results of the focus groups on insurance and asset ownership. Section VI discusses these results in relation to our original hypotheses, and Section VII provides a brief conclusion. • The purchase of insurance may be another way to broaden access to the mainstream financial system for underserved consumers. Based on the literature and focus group discussions, we find support for at least three of our four hypotheses. Insurance complements the goals of asset organizations insofar as insurance has helped some people cope with their financial setbacks, and focus group participants did not view insurance as a substitute for savings. Low- and moderateincome participants also had belongings that they wanted to protect, as well as their own health and the well-being of their family members. Many participants already had Profitwise News and Views May 2008 II. Asset Development and Insurance: Basic Definitions practices like maintaining a bank account or managing credit and saving to buy a home or start a business.6 The Asset Development Field and Insurance Asset development links different programmatic activities to the conceptual framework of capital formation and wealth creation.2 The asset-development field consists of a variety of programs and service delivery organizations that focus on savings, home ownership, small business development and continuing education for low- to middle-income individuals. The field coalesced around the proliferation of Individual Development Accounts (IDAs) in the 1990s,3 but asset-development organizations represent a diverse group that also offer financial literacy training, home ownership counseling, home purchase assistance, Earned Income Tax Credit (EITC) filing services, microenterprise development, and child savings accounts, among other services.4 These programs share a common principle that the ability to accumulate assets – to buy a home, pay for higher education, start a business, or save for retirement – is critical to a person’s economic advancement, along with a job and income. The asset preservation field has traditionally been somewhat distinct from asset builders. Asset-preservation programs focus on delinquency counseling, debt elimination, and asset protection.5 Information provided at IDA programs may focus more narrowly on home ownership, since eligible uses of matched funds tend to be for home ownership, business development, or post-secondary education. The information provided by microenterprise programs tends to focus on health care for self-employed individuals and insurance for business ownership (e.g., workers compensation or liability insurance). The information about insurance provided at EITC-filing sites is more limited. According to one recent review of the field, no EITC site offers information on life insurance as part of its asset building services.7 It is unclear how much information is provided by home ownership education counseling programs as well, since most providers develop their own curricula and educational materials. 8 Profitwise News and Views May 2008 The Insurance Industry and Community Reinvestment The responsibility of insurance companies to support community reinvestment (community assets) is also decentralized. The insurance industry is regulated solely at the state level. For each state in which an insurance company operates, the company must seek and receive approval of rates and policies by line of business (automobile, home owners, life, health, etc.). Three main types of insurance: Personal property/casualty consists mainly of insurance for automobiles, homes, and rental unit contents. At a minimum, auto insurance provides liability coverage. Coverage for property and medical costs may also be added to ...many insurance companies have been criticized for their low rates of coverage in certain lower-income and minority areas and their use of credit scores to set premiums... Insurance is not specifically cited in papers that review home ownership counseling programs, although the topics that are mentioned, such as Given the decentralized network of improving creditworthiness, service providers, it is difficult to understanding the closing process, and generalize about their treatment of recognizing the importance of insurance. Our conversations with a maintenance after home purchase 9 all handful of program operators suggest relate to the topic of insurance. The that many focus on entry-level asset one program that stands out is the building tools or work with public NeighborWorks® Insurance Alliance assistance recipients, and thus do not (NIA). NIA, originally called the National give much attention to insurance topics. Insurance Task Force, was created in When insurance information is included, 1994 to develop partnerships between the information varies with the specifics of a program’s goal. In financial education the insurance industry and NeighborWorks® organizations. The programs, information tends to focus on purpose of these partnerships is to how insurance fits in with other financial assist local nonprofits and insurance companies to provide insurance education, home maintenance workshops, and other services to residents so they can qualify for insurance. the auto policy. Property coverage pays for damage to, or theft of, the vehicle. Liability coverage pays for the policyholder’s legal responsibility to others for bodily injury or property damage. Medical coverage pays for the cost of treating injuries, rehabilitation, and sometimes lost wages and funeral expenses. Home owners insurance is sold only as a package policy. It covers damage to property, as well as liability or legal responsibility for any injuries and property damage policyholders or their families cause to other people on the premises. Renters insurance provides coverage on behalf of the party renting for damage or theft of their belongings. Property/casualty insurance is typically distributed through either captive or independent agents. Captive agents represent a single insurance carrier for a given type of policy; independent agents may represent several different carriers. Life/health insurance includes life and health insurance, long-term care coverage, and annuities and other pension and retirement services. Generally, products are distributed through agents, but also through financial planners, advisors, or similar professionals who hold agent licenses. In addition, large employers frequently offer some limited free or subsidized coverage, as well as options to purchase additional coverage and/or policy limits. Health insurance includes products from private health insurers as well as products offered through government programs. Private insurance is provided through the sale of individual and group policies. Large employers, trade associations, and other affinity groups are often able to negotiate preferred rates and guarantee member acceptance through the elimination of individual underwriting. While property/ casualty policies carry medical coverage, such coverage is conditioned on the occurrence of a covered accident. Health insurance covers the insured’s medical care regardless of cause. Although state insurance departments generally do not set firm community development requirements for insurers, insurance companies, agents, and other insurance intermediaries have long recognized the mutually advantageous benefits of community involvement. The industry press contains several examples of support for community asset building. Activities include financing nonprofits to develop residential and commercial real estate in lower-income neighborhoods, establishing a mortgage loan guarantee pool, and sponsoring local events and public education forums. The property casualty insurance industry has formed partnerships with local community development corporations nationwide. III. Survey Data Despite this support, many insurance companies have been criticized for their low rates of coverage in certain lowerincome and minority areas and their use of credit scores to set premiums (see Regan, 2007; Birnbaum, 2007; The Federal Trade Commission, 2007; Squires, 2006; Klein and Grace, 2001; and Wissoker, Zimmermann and Galster, 1997). In recent years, community organizations, some members of Congress, and state legislators have proposed applying the Community Reinvestment Act more broadly to cover some insurance companies and other non-depository financial firms that are becoming increasingly involved in small business lending.11 Insurers have tended to resist government attempts to institute further regulatory controls. Many of the same groups who are less likely to have a bank account are also less likely to have various types of insurance. Table 1 shows coverage rates for health, life and home owners insurance for various income groups. We report data from several sources since no one survey collects information on each type of insurance.13 (No national survey collects information on automobile insurance.) We also report on pension plan coverage because a number of focus group participants talked about relying on their pension assets; i.e., used these resources as a type of insurance, when they faced unexpected expenses. Each of these surveys is based on a different sample of the national population and thus the underlying income distribution of the surveyed population varies somewhat across the surveys. Two states have taken steps to require insurance companies to set aside a pool of money for community investment. The Massachusetts legislature passed the first act of its kind in 1998 requiring that the insurance industry establish investment funds for community development projects throughout the state, in exchange for relief from certain state taxes.12 In California, the California Organized Investment Network (COIN) was established in 1996 to provide an alternative to state legislation that would have mandated insurance company investments in low-income communities. COIN serves as a liaison between insurers and community organizations, working to identify investment opportunities with community organizations that are seeking investment capital. Also in California, Impact Community Capital is a for-profit insurance industry effort founded in 1999 to increase investments in underserved markets of the state. Impact purchases single-family and multi-family rental housing mortgages. Across different lines of insurance, the common trend is that lower-income households are significantly less likely to have coverage than higher income households, with the exception of Private Mortgage Insurance.14 In terms of health insurance, about 70 percent of those in the lowest quintile (incomes up to $27,000) have health insurance, compared with about 90 percent of people in the top 20 percent of the income distribution – and the majority of those covered at the lowest end have government-funded coverage. Ownership of life insurance also rises with income. About 34 percent of households at the lowest end of the distribution (incomes up to $18,000) have a member with life insurance, while 51 percent of those in the $19,000 to $33,000 range have life insurance. This compares to 84 percent of households with incomes in the top quintile. Of note, about 43 percent of the lowest-income households who have life insurance report having cash value policies, representing a higher proportion with cash-value policies than any other income group except that at the highest Profitwise News and Views May 2008 end of the income distribution. (Some respondents have both term and cash value policies). As with other financial products, access to an employer-based retirement or pension plan differs significantly across income groups. About 54 percent of survey respondents (or their spouses) at the lowest end of the income distribution are included in employer-sponsored pension plans, as are about 68 percent of respondents/ spouses in households with incomes between $19,000 and $33,000. Of these, roughly 40 percent are enrolled in defined benefit plans and 60 percent are in defined contribution plans. The difference in home owners’ coverage is also significant between households in different income quintiles. However, Profitwise News and Views since home owners insurance is mandatory for home owners with a mortgage, the more relevant contrast is in the underlying home ownership rates. These range from 45 to 55 percent for households in the first and second quintiles, to upwards of 90 percent for those in the highest income quintile. IV. Asset Building and Insurance – A Scan of the Literature A handful of research, policy, and practitioner studies have begun to outline the various connections between insurance and asset development, or conversely, the relationship between the lack of insurance and the erosion of assets. The Center for Financial May 2008 Services Innovation (CFSI, 2007) has written perhaps the only previous study that focuses specifically on the topic of asset building and insurance. Reviewing the opportunities for the insurance industry to serve traditionally underserved households, CFSI describes insurance as providing: (1) asset protection, protecting the specific assets that are insured as well as providing financial stability that lessens risks to other household assets; (2) indirect asset building, such as enabling home ownership; (3) direct asset building, like savings through life insurance; and (4) the potential for asset stripping from mispriced insurance products.15 CFSI also recommends a number of strategies to address these market opportunities, including offering insurance through check cashing outlets; partnering with community organizations for education and referrals; adding insurance features to transactions such as international remittances; and cross-selling financial services at key opportunities, such as during tax preparation. to borrow against or withdraw the cash value for retirement income or to pay college tuition or mortgages. Studies that examine the impact on assets and debt of not having adequate insurance coverage tend to focus on health coverage. For example, researchers of the American Dream Demonstration16 found that people with health insurance were significantly more In another paper looking at the likely to save in their IDAs than people financial practices of lower-income households, Seidman et al. (2005) find a without insurance; and that many correlation between asset and insurance participants withdrew (unmatched) savings from their IDA during the course ownership among low- and moderateof the demonstration to pay for health income households. They find that savers are more likely (than people who emergencies as well as cover regular do not report saving) to own homes and expenses.17 Medical issues were also identified as a leading contributor to cars, as well as have more insurance coverage, especially with respect to the bankruptcies in studies by Himmelstein et al. (2005) and Warren et al. (2000) “optional” insurance categories of life, (although Warren et al. found that those health, and renters insurance. In a who had insurance and those who did discussion dealing with the process of not were about equally distributed asset building in general, Collins and among those who identified a medical Baker (2004) advise that the purchase problem).18 Using 2001 data, of insurance should be one of the first steps in the course of accumulating and Himmelstein et al. (2005) also found that 15 percent of all home owners who maintaining assets, along with building took out a second or third mortgage financial literacy skills and saving. They cited medical expenses as a reason. note that the process for asset building and preservation is often approached from the other direction, where people borrow for homes or businesses with little if any of these tools. The basic wealth-building/wealthpreserving functions of insurance are also recognized by insurance industry associations and ratings agencies, such as the Insurance Information Institute, the Life and Health Insurance Foundation for Education, and A.M. Best, as well as by individual state insurance departments. Publications and Web sites by these entities note that the basic principle of insurance is to protect and hence to preserve assets, and that insurance can assist people more directly in building their assets. For example, “whole life” insurance policies provide a payout upon death, but also accumulate a tax-deferred cash value based on policy interest rate parameters. Policyholders may be able tool used by insurers to evaluate risk for both home and car ownership.19 Consumers with lower credit scores often pay higher insurance premiums or may be denied coverage entirely. A few studies also examine whether low-income and minority consumers systematically face barriers that lead to lower rates of coverage, making both insurance and asset ownership more difficult to access or more costly for them than for other groups. In the case of automobiles, Ong and Stoll (2006) find that people pay higher auto insurance premiums in poor and minority areas than elsewhere, even after accounting for individual characteristics, driving history, and coverage. Fellowes (2006) finds that families in lowerincome neighborhoods pay up to thousands of dollars more than higherincome consumers every year not only for car insurance, but also for car loans, home insurance, and home loans. 20 Ong (2002) shows that differences in average insurance costs across neighborhoods within a metropolitan area have large and negative impacts on car ownership rates. Raphael and Rice (2002) also show that differences Draut et al. (2005) examined the impact of medical debt on credit rating(s), and found that households that reported losing a job sometime in the last three years, as well as households that were without health insurance in the last three years, were almost twice as likely as others to use credit cards for basic livings expenses. Draut et al. (2005) examined the impact of medical debt on credit rating(s), and found that households that reported losing a job sometime in the last three years, as well as households that were without health insurance in the last three years, were almost twice as likely as others to use credit cards for basic livings expenses. This credit card debt carried over from month to month, and credit (insurance) scores are the primary across states in average insurance costs affect car ownership rates. The evidence on home ownership pricing is more anecdotal. Numerous complaints have been filed by consumer groups across the country charging various insurance companies with restricting or denying home owners insurance coverage in predominantly minority neighborhoods (see HUD, 2006, Jones, 1997, and Galster, 2006). Profitwise News and Views May 2008 A variety of sources discuss challenges from the distribution system as well. As CFSI (2007) describes it, once insurance agents have built up a “book of business” (i.e., servicing and receiving commissions from existing policies), the compensation structure creates a disincentive to pursue new opportunities, particularly from less-welloff customers. Agents have to balance the rewards of developing new customers against the time and cost it takes to pursue them. In a report of underserved communities, the California Department of Insurance (2004) notes that minority communities are not only being underserved, but minority customers are purchasing insurance that offers less coverage. A related issue involves under-representation by minority agents. A 2004 study by the Independent Insurance Agents and Brokers of America’s showed that minorities, particularly AfricanAmericans, are underrepresented among agency principals and managers.21 A 2005 survey by A.M. Best found that African Americans comprise about 14 percent of the U.S. population, but less than 3 percent of licensed insurance agents. This under representation may at some level discourage potential customers in minority communities. Despite these obstacles, several studies present evidence that lowerincome and minority consumers tend to have positive views about insurance. A 2005 survey by the market research and consulting firm The Polling Company, Inc. found that the lower one’s income, the higher the priority he or she assigns to life insurance. Seventy-nine percent of households earning between $30,000 and $50,000 per year said that life insurance is among the most important type of insurance coverage to own. In addition, 92 percent of African Americans and 82 percent of Hispanics said they believe life insurance is essential, compared with 72 percent of Whites. As reported by Stegman et al. (2006), other research has also found that African American households favor Profitwise News and Views life insurance (and real estate assets) over corporate debt and equity securities across all levels of household income and educational attainment; and Hispanic households are significantly more risk averse than non-Hispanic Whites. Focusing on auto, life, and home/renters insurance among Hispanic households in Los Angeles, the Tomas Rivera Policy Institute (2005) also found that lowerincome Latino consumers tend to hold an “affirmative attitude” about insurance and the insurance industry, even though a majority of respondents did not have either life insurance or home or renters insurance, and one-quarter of Latinos did not have auto insurance. A series of focus groups sponsored by the Center for Economic Progress (Research Support Services, 2007) similarly found that focus group participants view insurance as a good investment, not a luxury, and that participants felt that no age is too young to have life insurance. V. Focus Group Results To better understand people’s perceptions of the relationship between insurance and asset-development, and whether offering information or access to insurance in conjunction with other asset building strategies makes sense from the perspective of a (potential) client of an asset-development organization, we held four focus groups in Chicago in August 2007 to discuss the types of financial setbacks low- and moderate-income households have confronted, the types of savings they have, how they protect their valuables, how they obtain information about insurance, and what insurance issues they would like to know more about. The main selection criterion of all four focus groups was that households had low- or moderate incomes. The income limit reflected the eligibility threshold at many asset building programs.22 The annual incomes of the participants across all groups ranged from approximately $15,000 to $40,000, and the modal income range was $15,000 to May 2008 $25,000.23 (See Appendix B for charts related to participant characteristics.) For three of the four groups, an additional criterion was that a dependent child was living at home. (See Appendix A for a complete list of our screening questions.) Parents were invited to join the groups as they might have more incentive to consider insurance than people without children. The fourth focus group consisted of participants who were more than 50 years old, and the purpose was to capture the perspective of people whose longer life experiences might lead to a different set of concerns or plans with respect to insurance. Respondents who indicated on the screener that they had some type of insurance (including government health insurance) were chosen to participate. Recruitment and facilitation for the focus groups were carried out by Research Support Services, a research firm specializing in focus group facilitation and qualitative survey methods. Thirty-five focus group attendees were asked approximately 20 questions during the two-hour sessions. (A complete list of the focus group questions appears in Appendix C.) After each focus group discussion, participants were also asked to complete a brief questionnaire regarding their educational attainment, employment, amount of savings, life insurance coverage, and previous interaction with a community-based nonprofit. (These results are summarized in Appendix B.) We organized the responses to the focus group questions into five categories presented below: (1) Do people use insurance to cope with emergencies? Has insurance made a difference in the financial crises that people face? We asked people to talk about the kinds of financial setbacks they have faced and how they have coped with those setbacks. We wanted to obtain anecdotes from participants that would show whether or how insurance makes, or could make, a difference in terms of their financial stability and asset preservation. Our focus group participants cited numerous and wideranging financial setbacks. The two most common types of financial setbacks were those that reduced one’s income, such as a job loss or a reduction in workhours; and unexpected changes to family structure (divorce, adoption, death, and births) that require households to have higher incomes. As a response to losing a job or a pay cut, participants talked about finding a new job, getting temporary work, prioritizing their bill payments, or in a few cases relying temporarily on a second earner in the household. To cover immediate expenses, people also turned to credit cards, payday lenders, pawn shops, and car title loans, although these were described as one-time experiences that people vowed not to “When I first got those kids I worked repeat. A number of participants talked two jobs… My savings account was for about borrowing on their home equity something that comes up. I had like when they fell behind in their bill $18,000. But when I got those kids they payments. They were not able to obtain had all of those hospital needs and stuff… unsecured bank loans. To the extent I went through that money in less than four that people had cash-value insurance or months.” annuities (or pension assets), many had borrowed against these resources to In addition to these issues, people deal with their financial emergencies. mentioned health emergencies, medical They had withdrawn the money from expenses, and dental bills as contributing their 401k accounts or cashed out their to various financial crises. A few also life insurance policies. discussed loss or damage to physical property, such as a fire or flood and the “I had an annuity through the Board of cost of repairs. People also talked about Education. I put $50 into the annuity every paycheck. It turned out it was spending beyond their means during maybe $1,200 and the root canal was Christmas time. $1,000 and so I borrowed the money.” The magnitude of these setbacks ran “I had a 401K. At the age of 59 I was from the hundreds of dollars to the able to withdraw from it. I had like thousands. In general, participants were $15,000 in there. So, when I found out at only able to pay out of pocket for 59 I could withdraw from there I was unexpected expenses that ran in the using that to help pay my bills. Now I’m hundreds of dollars. down to like about $700.” “Once I got into the house that is what I “My husband was a nut about life wasn’t prepared for. Because I had the insurance. It really helped me in later expense of the child, the lights, the gas, years. I was able to cash it in when I the water bill, the phone, repairs, taxes, needed it.” repairs…I’m going to keep saying repairs because that is what has gotten me in the situation that I’m in now.” Everybody selected for the focus group had some type of insurance. For In general, participants did not rely on three of the participants (out of a total savings from their bank accounts to cope of 35), their only type of insurance was public health insurance. Among those with their most significant financial who had other types of (private) setbacks. Most of the people we talked to insurance (see Appendix B), several had savings, but these savings were quite described buying this insurance “aftersmall (see Appendix B). About one-third the-fact”—after their homes had been of the respondents had savings of less broken into, after their vehicles had than $100, and a little more than one-half been stolen, or after a funeral expense had total savings under $500. Many had to be paid. respondents also reported living from paycheck to paycheck. People also applied for government benefits like Medicaid and food stamps, mainly for their children. Older focus group participants used low-cost transportation and other services provided by city agencies. One woman relied upon a government disability insurance policy following an accident when she was living in California. No one felt they could count on unemployment insurance, and no one mentioned Social Security as a safety net. Other social insurance programs were not discussed. People also talked about using church charities for temporary financial shortfalls. A few people mentioned family as a last resort. When asked about the amount of money people feel they need to cope with financial crises, most people gave a number that ranged from a couple of thousand dollars to tens of thousands of dollars. They thought either health emergencies or significant repairs to their homes would require at least this much. (2) Why do people have (or not have) insurance? What are the ways in which participants currently protect their valuables and why? Focus group participants readily described the types of material assets that they would want to protect. These included their houses, cars, electronics, jewelry, family heirlooms, and artwork. Everyone acknowledged that insurance was not a matter of choice for home and vehicle owners. When participants had to make a decision to buy insurance, many did so because they had a sense of the imminent risk to themselves and their children of not having insurance, based on recent adverse events experienced either by themselves or by someone close to them. This sentiment affected purchases of property/casualty insurance, health insurance, and life insurance. “I paid for full-coverage on the car which I probably wouldn’t have done…if the van had not been stolen. It wouldn’t have been one of the priorities.” Profitwise News and Views May 2008 debt, laundry, gasoline, child care, tuition, and cell phones. Some of those without health coverage said they have not needed health insurance because their families were healthy, and some “If you got sick and you had to pay the count on free medical treatment at costs out-of-pocket you’d be bankrupt public hospitals. Some said they just overnight. It’s ridiculous the cost of cross their fingers. With the exception of medical care, hospital costs.” life insurance – some of the older adults contended that life insurance is not “In the transition of moving almost all necessary for people without children or of my stuff was gone. … Then I moved into the neighborhood that I live in now… grandchildren – no one said insurance I got robbed in the parking lot before. So, was unimportant. Those without optional it was like okay, I need renters insurance.” insurance said they did not have the money to pay for insurance. This applied In addition to insurance, participants to the purchase of insurance in general, said they protected their valuables with as well as to situations where insurance safety deposit boxes, alarm systems, policies lapsed due to respondents’ storage in someone else’s insured home, inability to sustain periodic payments an unactivated credit card, and even a gun. during fluctuations in household income or expenses. Overall, participants had positive views about insurance and understood “I think we are forced to be at risk, its purpose. some of us. I can’t afford to pay renters insurance or pay all of those extra things. Most reported being able to purchase So, I live at risk.” insurance when they wanted it, with the exception of health insurance in the “I think that most people would have case of a pre-existing condition or the coverage if cost wasn’t an issue. I know lack of a Social Security number. People somebody who went to the dentist and he also understood that insurance told them if you’d been taking care of their companies consider one’s credit score teeth you won’t have this problem. They when setting (or re-setting) prices, and didn’t have money for dental work. To me “higher end” companies may deny the dentist was wrong to say that.” someone based on their credit score. (3) Do people see a tradeoff between Perhaps the greatest dissatisfaction buying insurance and saving for mentioned involved health insurance, where people were not sure about what precautionary purposes? expenses were covered in their policies. This question was included to get at Some were also skeptical about whether whether savings and purchasing their creditors would be first to receive a insurance “compete” for the marginal life insurance payout rather than their dollar among focus group participants. beneficiaries. One respondent felt We wanted to understand whether policyholders were owed a rebate when people see savings and insurance as no claim is filed. complements, substitutes, or not related. We also wanted to understand whether The two main answers as to why participants’ priorities about savings and people did not have various types of insurance were money and information. insurance shift given the presence of one or the other. Many of the people without (optional) “I buried my parents who didn’t have life insurance, and the cost of burial…. you are talking $10,000 just to bury somebody now.” insurance cited the cost as a deterrent. Participants listed the various demands on their money that come before paying an insurance bill, including credit card Profitwise News and Views May 2008 Overall, respondents indicated that they do not make decisions about insurance based on savings, nor about savings based on insurance. People described the fundamental difference between the two in various ways. They said that “one is short-term and one is long term;” that “savings is having a pot of money on hand, whereas term insurance is building a pot of money;” and “savings are more flexible in the sense they help in case of any emergency, while insurance protects the material wealth that one already has.” “If something happens, the insurance is going to pay that amount right away, [whereas] me taking a long time to save it, I may not have saved up to that.” To the extent that participants saw a relationship between the two, they tended to agree that insurance would be even more important if one had savings. Insurance was described as a way to protect the money that one has. While participants did not see savings and insurance as substitutes, some have used their insurance (or annuities and pensions) for emergencies in ways that resemble short-term savings. In addition, participants talked about purchasing life insurance as an alternative to long-term saving, for people who do not expect to be able to save large amounts of money. “The $112 a month I pay on life insurance is on a $200,000 policy. Me saving a $100 a month in the bank is not going to leave that kind of money if I die.” “We have a lot of life insurance to leave [our daughter] to basically give her wealth. When people get life insurance in lump sums you know six figures or whatever it can change your lifestyle. If you have good life insurance when you do go, the kids can be set.” (4) How do people get information about insurance? The purpose of questions related to distribution was to investigate the channels that participants currently go through to access insurance, and to gauge respondents’ willingness to obtain insurance (or related information) through a community organization, such as those involved in asset building, or through a financial institution. In general, most participants said they looked for information about insurance over the Internet. People said they also received information from employee unions or from friends and relatives who already had bought a particular type of insurance. Older respondents also referred to advertisements, direct mail, and Consumer Reports magazine. While many said they used the Internet to get information, many preferred to purchase insurance face-toface. The source that participants said they were most likely to go to was insurance agents. Many had long histories with their agents, although many also believed that an insurance agent could “stick you with anything” just to earn a commission. A few people said they buy insurance over the phone, but some people expressed suspicion about the credibility of telemarketers. On the other hand, respondents did not think immediately of community organizations as trustworthy sources of information about insurance, with perhaps the exception of churches. Participants had the impression that the community organizations they knew would not have the answers to their insurance questions, mainly because staff from these organizations had been unable to answer other inquiries in the past. Yet some participants also believed that advice from an impartial, nonprofit organization that was not trying to sell a particular product would theoretically make a good source to answer people’s questions about insurance. “It would be really nice to be able to call somebody on the phone and not have them be trying to sell me something. It could even be a non profit or somebody that didn’t have a vested interest in it that I could talk to.” In addition, a handful of participants indicated (on the end-of-session questionnaire) that they had been in contact at some point with a community organization regarding medical insurance, home repairs, or home purchase information. Participants also gave mixed answers about whether they would use a bank either to get information about or purchase insurance. Some said they did not know that banks offer these products, while others said they had found out by visiting a bank branch or receiving information in the mail. “They walk around advertising insurance [because] they are trying to sell you this product. They’ve got mortgage, life insurance, and car [insurance]. They actually take time to break it down. I just didn’t have the time.” The reasons given for not wanting to receive insurance advice from bankers ranged from not trusting banks to thinking that banks were not the right place to get information about insurance. “Why would I go for car insurance to my bank? No. I would go to where it belongs…I would go to the agencies.” “There are a lot of people in the community that don’t trust [banks]. …That is why we have so many currency exchanges. People pay those high rates rather than get a bank account, because that is what they know. That is what they trust.” On the other hand, respondents did note that they would be open to working with a bank if they trusted the institution. “[If] we know this bank is here to serve the community and they are talking about insurance for the area, then yeah I would probably go to that because I want to know what is going on to keep up with what is going on in my neighborhood.” The other condition that participants thought might change their view of banks was if banks acted more like brokers for various insurance companies rather than offering the products of a single company. “If there were many different providers or programs or whatever that the bank was going to give me, that would make me feel like that was mutually a service to me and a service to the bank.” (5) What additional information would participants like to know about insurance? One of the basic goals of the focus groups was to get an understanding of the type of information that people feel they need to know about insurance. The discussion revealed that at least a few participants had a fair amount of knowledge about the topic. They could talk about the tradeoffs between required liability-only and full auto coverage policies that insure one’s vehicle. They understood the role of credit scores in the sale of insurance. And many could explain or talk about their personal experiences with term versus whole-life policies. A number of people had less experience with insurance and were eager to have their questions answered. For those who expressed confusion, their questions related to insurance vocabulary, the exclusions to their policies that appeared “in the fine print,” and other conditions that hinder their making comparisons between different companies’ policies. “I remember like when I was calling [my insurance company] and they were asking me all of these questions: How much do you want for your deductible? And I was like my what? I don’t know ... just give me a quote. I’m just guessing.” Profitwise News and Views May 2008 “You’ll call up a place and you say I’d like to have some insurance. They say well what kind? Well, I really don’t know, what kind do I need? I don’t know what kind I need. It would be nice to know what kind you need.” By the same token, the message came through that participants would be more likely to take advantage of information and other assistance at exactly the times they needed the information most. Participants also expressed confusion about the different types of insurance available and their costs. While some people swore by renters insurance, others said they had never heard of it. Others thought of it as “a little luxury” that was “unaffordable.” Participants also appreciated the complexity of life insurance and often felt self-conscious about asking someone to take the time to “break it down” for them. Many agreed that they could use help figuring out what policy to get, how much coverage they needed, and what would be a “good or bad deal.” Participants had very different perspectives about the comparative advantages of term, whole life, and burial (small face amount life) insurance. Participants wanted to know about choosing term or whole-life policies, they wanted to understand the value of life insurance as a savings instrument compared to other vehicles, they wanted to know whether life insurance should be bought to leave children an inheritance, and if they would be wasting money by paying for (or signing up for) a certain type of policy. “I would only want the information when I needed it, basically. Like the week that I was making that decision.” Participants also felt uninformed about the supply of quality information that may already be available to consumers with similar incomes as theirs. Their sense was that information and guidance about lowering premiums or purchasing lower-cost insurance may be available from city government or other sources, but they did not know about it. “There are so many different types of programs out there that could help you and you don’t know about it. ...” “They should have public service announcements on anyway that you can plan out your life. They should have them on the bus.” 10 Profitwise News and Views “If there were workshops at your bank or your community center that there was a person that you could go to on an asneeded basis just to ask questions.” Finally, participants thought it would be helpful to receive information about insurance as part of a conversation about financial planning more generally. Some thought the information could be integrated with teaching about money management and budgeting. This was in keeping with the point that participants could use customized, timely information. “…A lot of people don’t have information [because they don’t have] access to the research to go from one policy to another in a short period of time. I think that what is lacking in the industry is the personalization of different types– car insurance, renters insurance–so you kind of know which direction to go.” “There are so many different ways of saving that we don’t know about that might be easier for some people… Not just take their money, but give them more knowledge on how to handle it.” VI. Review of Hypotheses The findings from the literature scan and focus group discussions offer substantial support to three of the four hypotheses stated at the outset of this paper. First, information or more direct access to insurance would seem to complement the strategies and goals of asset-development/preservation programs. Insurance has helped some participants cope with some of the financial setbacks they have faced. In addition, focus group participants did May 2008 not view buying insurance as a substitute for savings goals, and participants made a distinction between the purpose of insurance and that of precautionary savings. This suggests that asset building/preservation programs would not upset their existing goals by encouraging people to set aside money to buy insurance. Many asset-development/preservation organizations may also be in a good position to address many of the basic questions about insurance that participants raised. Although participants did not think of communitybased organizations as places to obtain insurance information (keeping in mind focus groups participants were not already enrolled in asset-development programs), they did think an “impartial source” that could take the time to answer their questions could be a valuable resource. Many assetdevelopment organizations already help clients sort through their basic expenses. Many already help job seekers compare the benefits offered by different employers as well. There is also a precedent for asset building organizations to provide comprehensive financial planning, including information about insurance. 24 For example, the San Francisco-based EARN has begun a pilot program to match graduates of its IDA program with financial advisors to help them evaluate their property/ casualty and life insurance options and other investments. In terms of the second hypothesis, both the literature and focus group discussions give support to the idea that low- and moderate-income households have reason to need insurance and want to know more about insurance. Participants clearly saw insurance as a relevant topic. They had assets that they wanted to protect. They thought about their children’s futures and their own futures. While participants did not rely on insurance as the only solution, or even the most often-used solution to their financial difficulties, the magnitude of their financial setbacks tended to call for responses in excess of the few hundred dollars they held in a bank account. The “emergency funds” needed were more consistent with insurance payouts than with balances from saving. Even respondents who did not have insurance thought insurance was a good idea. Many participants also had a range of questions about insurance. In addition to those identified by participants themselves, participants seemed to need more information about the pros and cons of using long-term insurance and retirement vehicles for short-term emergencies; they needed to know about less well-known insurance products like long-term care and renters insurance; and they expressed an interest in learning how to compare insurance products based on price and coverage. To be sure, these results were related to the design of the focus groups. Most participants were parents, and they indicated on the screening instrument that they had at least some type of insurance coverage. People also came with a mindset to learn, and the more insurance was discussed, the more people were persuaded of its importance. Even so, the results suggest that talking about insurance in the context of asset ownership is a sensible discussion for people whose incomes are low, including the population that qualifies for asset-development and asset-protection programs. These results relate to our third hypothesis as well, that households who qualify for asset building services represent a potential market for insurance companies. Participants were not only open to receiving information about insurance from representatives of the insurance sector, but they anticipated using an insurance agent to purchase insurance. Even those who were not already buying insurance saw themselves as part of the potential insurance customer base. With few respondents suggesting otherwise, participants who wanted insurance were generally able to find a property/ casualty or life insurance policy (although participants did not necessarily know if the policy was offered through the preferred, standard or sub standard markets, or even if they received a FAIR plan or forced-place policy). 25 The significantly lower rates of coverage among lower-income households and their positive views about insurance also suggest that there may be an unmet demand for insurance among this population. The hypothesis for which we did not find as much direct support has to do with using the banking system as a way to obtain information or purchase insurance. Many respondents indicated they would not readily use a bank to buy insurance. While this response downplays the potential synergies between purchasing insurance and using the mainstream financial system, participants did give some feedback to suggest that asset building organizations should not dismiss the banking system as a source to provide information and access to insurance for their clients. First, borrowing, even more than insurance, was the main method for dealing with emergencies. Borrowing on one’s home, annuities or other investment assets was only possible for those who had access to either the credit system or investment vehicles. In addition, some participants agreed at the end of the discussions that they would want more information about the insurance services that banks offer. And banks may already be addressing some of the concerns that participants expressed about obtaining insurance through a bank. For example, participants did not like the idea of a bank offering the products of one particular carrier, when in fact banks often own independent insurance brokerages, offering customers the chance (in theory) to compare policies and choose from a variety of companies. Participants also expressed concerns about the credibility of some insurance agents, while purchasing insurance through a bank has the advantage of dealing with a “vetted” insurer. Finally, participants expressed an interest in financial planning as part of the overall purchase of life insurance. Another advantage of working with banks is their ability to provide more comprehensive financial advice. As CFSI (2007) notes, insurance transactions typically involve much more advice than individuals who do not otherwise avail of mainstream financial services generally have access to. Since the passage of the Gramm– Leach–Bliley Financial Modernization Act of 1999, insurance companies, banks, mortgage companies, and securities firms have been allowed to merge with and acquire one another for the first time since the Great Depression. Somewhere between 2,000 and 3,000 U.S. banks now offer insurance products, including virtually all of the largest institutions. VII. Conclusion While a number of studies have examined the topic of savings and asset ownership among low- and moderateincome individuals, few have looked at the role of insurance in the acquisition or protection of assets among this population. The findings of this study give support to the idea that information about or additional access to insurance complements the strategies and goals of asset-development and assetpreservation organizations. Many lowand moderate-income households have reason to need insurance and want to know more about it. Focus groups revealed that people often used savings as insurance vehicles, and cashed-in life insurance policies or spent down their long-term financial assets when faced with unexpected expenses. They also revealed that households who qualify for asset building services see themselves as part of the market of insurance companies, and people are interested in products or services that help integrate the purchase of insurance with other financial decisions. The findings of this study build a case for asset-development Profitwise News and Views May 2008 11 organizations to consider the benefits and challenges of incorporating more information and access to insurance into their programs. This study also creates a framework for a collaborative discussion between asset development organizations and insurance professionals, with the potential to draw a greater number of financial companies into the conversation about financial access and inclusion. departments of insurance regarding insurance usage by income or race, because these criteria are expressly excluded from the determination of premiums. 14 Coverage rates do not control for employment or demographic factors. 15 Schneider and Gartner, 2007. NOTES 16 The American Dream Demonstration was the first systematic study of Individual Development Account programs. 1 Formerly known as the Corporation for Enterprise Development. 17 See Schreiner and Sherraden M., 2002. 2 Merced and Colon, 2006. 18 Warren, Sullivan,-- and Jacoby, 2000. 3 IDAs are matched savings accounts held by mainstream depositories that are set up to receive publicly or privately funded matching grants for accountholders who regularly deposit money into these accounts. 4 Venner, 2006. 5 Woodstock Institute and National Community Reinvestment Coalition, 2006. 6 An example of a financial literacy curriculum that teaches about insurance is the “Your Money and Your Life” curriculum from Illinois Extension. This curriculum devotes a chapter to insurance, including health insurance, disability insurance, auto insurance, home/renters insurance, and life insurance. 7 Collins and Baker, 2007. 8 McCarthy and Quercia, 2000. 9 Ibid. 10 For examples, see LISC and the Insurance Information Institute. 11 Yago, Zeidman, and Abuyuan, 2007. 12 Hettinger, 2002. 13 Little information is available from the insurance industry or (state) 12 Profitwise News and Views May 2008 24 See Collins et al., 2007. 25 Fair Access to Insurance Requirements (FAIR) plans are insurance pools that sell property insurance to people who cannot obtain coverage in the voluntary market. FAIR plan policies may cost more than private insurance and may offer less coverage. Forced place insurance is home owners insurance assigned by mortgage servicers to borrowers whom they believe do not otherwise have insurance. Appendicies available at www. chicagofed.org/community_ development/files/pnv_may08_ sped_appendix.pdf 19 Information Policy Institute, 2005. BIOGRAPHIES 20 A sample of auto insurance quotes in Chicago found drivers in lowerincome neighborhoods in the metropolitan area paid an average annual premium of $628, while drivers in the highest-income neighborhoods paid an average of $500. Robin Newberger 21 Kertesa, 2006. 22 Most IDA programs stipulate that clients cannot earn more than twice the federal poverty level (about $21,000 for a family of four), since the main sources of funding are the Assets for Independence Act and Temporary Assistance for Needy Families. Asset programs funded with money from the Department of Housing and Urban Development (HUD) may serve people at 80 percent of median income (in Chicago, incomes up to $60,000). The maximum income to qualify for the Earned Income Tax Credit was about $38,000 in 2007. 23 Low-income households are defined as those at 80 percent of median or below; moderateincome households are those between 81 percent and 95 percent of median income. Robin Newberger is a business economist in the Consumer Issues Research unit of the Federal Reserve Bank of Chicago. In her role, she has researched, written, and published numerous articles on topics including immigrant financial market participation, Islamic finance, and individual development accounts. Ms. Newberger holds a Bachlor of Arts from Columbia University, and a master’s degree in public policy from the John F. Kennedy School of Government at Harvard University. Ms. Newberger holds a Chartered Financial Analyst Designation. Michelle Coussens Michelle Coussens, A.R.M, C.P.C.U, R.P.L.U., is a senior budget, planning, and controls administrator working in the Research Department of the Federal Reserve Bank of Chicago. In addition, she conducts applied research in the area of financial literacy and also retains an interest in insurance topics. She previously worked in the insurance industry for over 15 years. Consumer Issues Assets and Opportunity in the Midwest: A comprehensive look at the 7th District based on the CFED Scorecard by Ida Rademacher and Kevin Keeley There is perhaps no better or more tangible indicator of the strength of an economy than the measure of assets and protections – financial, business, home, education, and health – built by families and society. Not only does an accounting of the amount, range, and distribution of assets of an economy provide an incisive picture of the current health and resilience of an economy, but more importantly, it reflects the ability of an economy and the families within it to adapt, to find advantages, and to shape the future. The Corporation for Enterprise Development, now known as CFED, a national nonprofit that works to promote economic opportunity, has long been an advocate for asset building and the role it plays in alleviating poverty and bolstering financial security for individuals and families. Assets move families beyond living paycheck to paycheck and give them tools to plan for the future. “Getting by” may require only a paycheck, but getting ahead requires a variety of assets, a financial safety net, education and healthcare. CFED’s 2007-2008 Assets and Opportunity Scorecard (Scorecard) continues CFED’s far-reaching examination of asset accumulation and asset policy. The Scorecard, which is available in full at www.cfed.org/go/ scorecard, presents a comprehensive look at wealth, poverty and the financial security of families in the United States. The Scorecard ranks the 50 states and the District of Columbia on performance measures in the areas of financial security, business development, home ownership, health care, and education. These measures provide an expansive and detailed view of the variation in net worth, ownership, and debt – not only geographically, but along race and gender lines. The Scorecard also details state-bystate information on 38 key policies in these areas that can help or hinder job that pays a good income. It also has been effective in breaking down some of the disconnected thinking that advocates and planners can fall into, and it has brought together proponents from diverse fields to discuss the interrelationship of their causes. But at its core, the Scorecard aggregates data, and is an excellent tool for researchers, consumer advocates, and policymakers to assess the strengths and weaknesses of state economies. It can also help to define steps to address shortcomings. Assets move families beyond living paycheck to paycheck and give them tools to plan for the future. “Getting by” may require only a paycheck, but getting ahead requires a variety of assets, a financial safety net, education and healthcare. citizens’ abilities to succeed financially, and identifies 12 core policies that are important in creating a hospitable environment to building assets and keeping them. This comprehensive view is important for many reasons. First, it draws attention to the various factors that affect personal economies beyond simply having a good Using the Assets Scorecard, we will look at the strength of the economies in the states comprising the Federal Reserve System’s 7th District1 and how residents of the District’s five states are doing in terms of building and preserving assets. We will also identify policies that are in place among the states to support and protect asset building among the most vulnerable populations and detail Profitwise News and Views May 2008 13 how advocates and policymakers are acting on findings of the Scorecard to improve asset policy in their states. Regional Highlights from the 20072008 Assets and Opportunity Scorecard Just as savings and assets help families move toward brighter futures, the Scorecard was created to help guide states as they work to build better economic futures for their residents. Looking across the states of the Federal Reserve’s 7th District, the Scorecard tells the story of a region where families are facing serious threats to financial security, and where states are pursuing strategies with mixed success to help families protect and build assets that can serve as the basis for upward mobility. The following analysis gives a brief snapshot of how the states in the region performed on key outcome and policy measures in the Scorecard. Net Worth Measurement of median net worth provides a basic indication of the level of wealth that families possess that can help them weather crises and build a solid basis for a better future. All five states in the Federal Reserve’s 7th District ranked among the Scorecard’s top 20 for net worth. Despite the District’s relative wealth, two states, Illinois and Wisconsin, actually recorded slight reductions in household net worth between 2002 and 2004, a time when national averages were trending sharply upward due to expanding home ownership and rising home values. of five states have less than 10 cents. That magnitude of disparity underscores the need for focused efforts to reduce racial wealth inequality. Indiana’s minority households have 23 cents in assets for every dollar held by Whites, giving them a top ten ranking for highest level of minority asset equality. Indiana also has the number one ranking for genderbased asset equality; it is the only state in the country where women and men have equal net worth. Asset Equality While wealth inequality has narrowed among different groups, large disparities persist. The Figure 1 illustrates the level of asset inequality that exists between White- and minority-headed households in each state in the 7th District. For every dollar in net worth held by White households, minority households in three 14 Profitwise News and Views May 2008 Asset Poverty Given the importance of assets for household economic self-sufficiency, the Scorecard expands the notion of poverty to include a minimum threshold of wealth needed for both security and mobility. Our definition of asset poverty measures the proportion of households in a state who lack sufficient net worth to sustain themselves at the poverty level for three months, should they lose their primary Minority home ownership also continued to lag substantially behind that of White households. All five ranked among the 20 states with the worst racial disparities in home ownership rates. Education source of income. Nationally, CFED found that 22 percent of all U.S. households and nearly 40 percent of minority households are asset poor. The 7th District states look relatively strong in comparison to other regions with regard to this measure. Four out of five states rank among the top ten for their relatively low incidence of asset poverty. But disaggregated by race or gender, every state in the group falls down the rankings by notable margins. Disparities in asset poverty between male- and female-headed households are narrowing in the region, as is the gap among minorities. Still, minority households remain more than twice as likely to experience asset poverty as White households. Bankruptcy and Debt Bankruptcy is included in the Scorecard as an indicator of the prevalence of wealth erosion among a state’s population. Per capita consumer, bankruptcy filings increased in all five states in the region between 2003 and 2004. Four of the five states in the 7th District ranked among the 20 states with the highest bankruptcy rates, and Indiana experienced the highest filing rates in the country at 12.5 percent. Bankruptcy results when a household’s expenses far exceed its income, whether from medical debt, job loss, death, divorce, or other factors. In the Midwest, rising unemployment and mortgage interest rates appear to be key factors contributing to the growing incidence of bankruptcy. Families who were once self-sufficient are being overwhelmed by debt. Home Ownership While not directly measuring home equity, the home ownership rate provides an indication of how many families in a state have the opportunity to build wealth in the form of home equity. Home ownership rates in all five states exceed the national average of 68.9 percent. Unfortunately, the region also has some of the highest foreclosure rates in the country. All five states in the region ranked among the top ten states with the highest foreclosure rates in the country during 2006, and 2007 statistics show additional increases in foreclosure rates across the region. The incidence of subprime lending contracted slightly in all five states between 2006 and 2007, but remains in double digits for all but Iowa. Education is one of the key building blocks for financial security and economic mobility. Those with a college degree earn significantly more than those with just a high school diploma. Moreover, data from the Federal Reserve’s Survey of Consumer Finances indicate that, in 2004, families in which the head of household had a college degree had more than three times the net worth–at the median–as families whose head of household had only some college. In the 7th District, college attainment rates increased in Illinois, Iowa, and Michigan between 2002-2004, and decreased in Indiana and Wisconsin. Wide disparities in college attainment continued to persist among individuals of different means. The wealthiest 20 percent of Americans in the five states complete college at a rate almost five times that of the poorest 20 percent. Health Care One of the greatest threats to a family’s financial security is an unexpected – and uninsured–medical emergency or illness. For families without health coverage, particularly those with low-incomes, the use of credit cards or other forms of debt to cover major medical expenses is a leading cause of bankruptcy. Nationally, nearly one in five low-income children and one in three low-income parents is uninsured. Although all states in this analysis exceed the national statistics in their efforts to insure low-income families, progress across the region has been mixed since the 2005 Scorecard. Indiana, Illinois, and Michigan all have improved rates of insurance among lowincome children, and Michigan now ranks third best in the country for its efforts to Profitwise News and Views May 2008 15 lower the population of uninsured children to 9 percent. Overall, the Scorecard shows that families in the region exhibit relatively strong levels of financial security in comparison with other parts of the country. But that financial security is not evenly shared among all families, and increasing foreclosure, bankruptcy, and unemployment rates in the region pose real threats and remind us of the fragility of the asset base that protects families from crisis and enables them to shape their future. The next section highlights several policies that states in the region are pursuing to help families preserve and protect the assets they have, and to build and strengthen their financial resiliency. families save for home ownership, education, and business ownership. State Policy Options for Asset Building and Asset Protection Increasingly, states are leading the way in promoting asset building and developing policies that help families build and protect financial assets. Through the Scorecard, CFED works with partner organizations across the country to develop state asset-building agendas, educate advocates and policymakers on key asset-building policies, and broaden the number of stakeholders who see asset building as relevant and important to their work. Below we highlight some of the key policy efforts underway in states in the 7th District. • Also in Illinois, the Sargent Shriver • Illinois, in particular, is emerging as a national standard bearer on policies to support home ownership and affordable housing, expand access to wealth-building opportunities, and broaden health care coverage. In 2007, Illinois enacted legislation to create AllKids, which provides affordable, comprehensive health insurance for all children in the state. Illinois lawmakers also allocated funding for the state’s Individual Development Account (IDA) program to create incentives to help low-income 16 Profitwise News and Views May 2008 National Center for Poverty Law is using Scorecard findings to support its work on a policy agenda covering an array of asset-building issues including: an expanded state Earned Income Tax Credit (EITC); asset limits in public benefits programs; consumer protection bills; children’s savings account policy; and payday lending regulation. The Shriver Center has been instrumental in the establishment of a legislative task force to review and make recommendations on savings accounts at birth for all Illinois children. The task force will issue its report and recommendations by September 2008. • In Indiana, affordable health care coverage is at the top of advocates’ 2008 policy agenda. The same is true in Iowa, Wisconsin, and in many states across the country. Indiana and Michigan also boast two of the nation’s strongest IDA programs, with stable funding at or near $1 million annually. Both states were pioneers in IDA policy, and their programs are held in high regard among assetbuilding advocates and IDA practitioners around the country. • Iowa lawmakers made impressive strides on asset-building policy in 2007, as they made the state’s existing EITC refundable and passed legislation to establish a voluntary, statewide preschool program for four-year-olds. That program is expected to provide preschool access to 90 percent of Iowa fouryear-olds by 2012. Iowa is also focused on curbing predatory lending, increasing state support for microenterprise, and increasing transparency and accountability in state budgeting and tax expenditures. • In Michigan, the Community policymakers also are considering expanding state supported preschool programs for four-year-olds. Wisconsin also has sought to boost asset-building opportunities for lowincome families through microenterprise support; the state allocated more than $600,000 in CDBG2 funds for microenterprise last year. In addition, Wisconsin has effectively eliminated asset tests for Food Stamp applicants. The states of the 7th District have established clear precedents for promoting and enacting policies to support asset development and expand economic opportunity, and the Scorecard findings have provided a framework and a frame of reference for this work. In light of enduring inequalities and families’ tenuous financial standing revealed by the Scorecard data, it is clear that considerable work remains to be done in the realm of asset-building policy. NOTES 1 The Federal Reserve’s 7th District comprises roughly the northern twothirds of Illinois and Indiana, the southern peninsula of Michigan, the southern two thirds of Wisconsin, and the entire state of Iowa. 2 Community Development Block Grant BIOGRAPHIES Ida Rademacher Ida Rademacher is CFED’s Research Director. In addition to the Scorecard, she is responsible for the development of key research publications and for working with CFED’s research partners in government, academia and community-based institutions. Kevin Keeley Kevin Keeley is a Policy Associate at CFED. He led the state asset-building policy research for the Scorecard. Economic Development Association of Michigan (CEDAM) has made predatory mortgage lending its highest priority for 2008 in response to the state’s particularly acute foreclosure crisis. CEDAM has taken a leadership position in convening a variety of statewide partners on this issue, resulting in the introduction of a legislative package that covers an array of mortgage and predatory lending issues. Another CEDAM goal is modifications to the state’s IDA tax credit. Michigan also has removed asset limits for participants in the state’s Food Stamp program. • Wisconsin has taken significant action to increase asset protections and reduce disincentives to save for low-income families. Like Illinois, the state provides Medicaid coverage to parents up to 192 percent of the federal poverty level, and has eliminated asset limits for its state Medicaid program. Wisconsin Profitwise News and Views May 2008 17 Consumer and Community Affairs Division P.O. 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