Do You Have Enough Life Insurance? Many Americans Are Underinsured
September 24, 2015 | Your Finances
Got life insurance? If you’re like many Americans, the answer is yes, but the amount you have is probably not as much you need.
A recent study by the Life Insurance and Market Research Association (LIMRA) found that a majority (60 percent) of people own life insurance; however, nearly one-third (30 percent) said they need more coverage then they currently have.
Nicole Holland-Hong, a wealth management advisor with Northwestern Mutual, isn’t surprised by these facts. “Many people have life insurance as part of their benefits package at work and assume that this is all they need. Yet group life insurance usually provides just a basic amount of coverage, which typically ends if you leave your employer for any reason. As a result, a group plan alone may not be enough to provide the financial protection you want for your loved ones,” said Holland-Hong.
In fact, the same LIMRA study found that 43 percent of respondents said that they would have trouble paying their everyday living expenses within six months, if not sooner, if a primary breadwinner were to die today.
According to Holland-Hong, life insurance can serve many purposes, including helping to meet final expenses; but its most important function is to replace a lifetime of lost earnings should you die prematurely. To ensure you have sufficient coverage to protect your loved ones, Holland-Hong suggests you make a list of your current expenses and future goals, and then ask yourself: How would those financial needs and goals change if something happened to you?
“Would your family have enough resources to pay off your mortgage or any debt you may have? Would they be able to remain in your family's house? Would your children still be able to go to college? Would your spouse or partner be able to retire comfortably? Most people want their loved ones to maintain their standard of living even if they’re no longer here,” said Holland-Hong. “However, if your life insurance death benefit doesn’t replace a significant part of the future income that would be lost if you passed away, you may need more coverage.”
Some people rely on a commonly used rule of thumb to decide how much life insurance they need. “Ten times your annual salary can be a good place to start, but keep in mind it’s just a shortcut. You’ll likely need to adjust that amount depending on your age, life circumstances and specific needs,” said Holland-Hong. “For a more accurate picture, Northwestern Mutual has an easy-to-use online calculator available on its website. This easy-to-use tool estimates how much life insurance coverage your family may need to cover future expenses in the event of your untimely death.”
Once you understand how much insurance you need, the next step is to determine the type that best fits your needs. Generally, there are two types to choose from: term and permanent life insurance. Term insurance is more affordable because it does not build cash value and provides protection for a set number of years. Permanent life insurance builds cash value you can access as a source of funding and it is designed to provide protection for as long as you live.
“Term insurance provides coverage for a stated stretch of time, say 10 or 20 years, and pays a death benefit only if you die during that period,” explained Holland-Hong. “In contrast, permanent life insurance provides coverage for your entire life, assuming you pay your premiums on time. Permanent life also builds cash value, which you can utilize during your life for any purpose. Term insurance does not build cash value, which means that the policy has no value once the term ends.”
Another option to consider is buying a term policy that will allow you to transition your coverage to permanent life insurance as your budget allows over time.
Many people assume that getting the right policy for their needs will be expensive. Yet LIMRA has found that people overestimate the cost of life insurance by nearly three times. This is where a financial representative can show you the importance of this piece in your financial plan and how life insurance can fit into your budget.
An experienced financial professional can help you determine an appropriate coverage level based on your lifestyle, mortgage and other debt, and your financial goals for the future. And finally, he or she can help you monitor your needs to help ensure you continue to have the enough coverage to protect your loved ones financially should something happen to you in the future.