Presented by Matthew A. Clayson

How do you know if you are underinsured? If you’ve purchased life insurance, you’ve taken an important step in protecting your family’s financial future, but you still may be underinsured. Such coverage can help your loved ones maintain their living standard in the event you should pass away prematurely, or at least eliminate some of the stress of making ends meet.

But how do you know if you have enough coverage? That can be a complicated question. And possible answers are likely to change over time. Life insurance is not a “set it and forget it” financial solution. As circumstances change, so do your coverage needs.

You may need to revisit the amount (and type) of life insurance coverage you have if:

1. Your family has grown.
2. Your stay-at-home spouse is not insured.
3. You only have group life insurance through work.
4. Your income rose.
5. You have significant debt.
6. Your financial goals have changed.

Life Insurance Policy Review

There is no one right answer. The appropriate death benefit amount differs for everyone depending on their assets, income, and financial goals.

How Many are Underinsured?

Underinsurance is common. According to Life Happens, a nonprofit consumer education group, 41 percent of U.S. adults — both insured and uninsured — say they do not believe they have enough life insurance protection.¹ Some started off with sufficient coverage, but failed to increase their policy amount as their income and financial obligations grew.

Of course, the “right” amount of coverage is relative. People purchase life insurance for different reasons. Often, it’s used to replace the policyowner’s lost income if he or she should die unexpectedly, so their surviving spouse and kids can pay the bills. Others buy whole life insurance to provide for a spouse in retirement or cover long-term care expenses. And some use it as an estate planning tool to pass money along on a tax-favored basis to their heirs, so they may not realize they are underinsured.

1. Your family has grown -If you added a new family member to your flock, it may be time to increase the size of your life insurance policy. According to the most recent government estimates, it will cost the average middle-income, married couple nearly $311,000 to raise a child through age 18. That does not include the cost of a college education. If you aim to cover your kid’s college education, braces, and future wedding in the event that you are no longer around, those expenses should be factored into your death benefit as well.

2. Your stay-at-home spouse is not insured-It’s a common misconception that stay-at-home parents do not need life insurance coverage. True, they don’t produce an income. But if they should pass away when the kids are still young, the breadwinner would need to pay for day care or a nanny.

One more reason to insure a stay-at-home parent: It protects the earnings potential of the breadwinning parent, so he or she would not have to scale back hours or take a less-demanding job to keep their household afloat.

3.You only have group life insurance-Employer-provided life insurance is a great benefit for many, but the amount provided may not be sufficient to protect your family from financial loss. Group life insurance is typically not portable, either. And, if you develop a health condition between now and when you leave your job, you may no longer be eligible for the lowest rates, or qualify for private insurance at all.

To estimate how much life insurance coverage his clients should have, Guarino said he starts by calculating the cash-flow needs (through retirement) of each spouse and any dependent children with the assumption that the other spouse has passed away. He then compares that figure with their cash flow sources.

4. Your income rose-A bigger paycheck is a good thing, but if your family depends on your income to cover their living expenses, your life insurance coverage needs to keep up. It may be time to review your coverage needs if your salary has grown substantially since you purchased your policy.

Remember, the purpose of life insurance is to provide a big enough safety net that those you leave behind would be able to maintain their lifestyle if you were no longer around. If that lifestyle has changed, your coverage amount should, too.

5. You have debt-You may need more coverage if you have private student loans, mortgages, medical bills, or other debts.

Remember, the purpose of life insurance is to provide a big enough safety net that those you leave behind would be able to maintain their lifestyle if you were no longer around. If that lifestyle has changed, your coverage amount should, too.

6. Your financial goals have changed-Many couples purchase budget-friendly term life insurance when they start a family, primarily because it costs less. But as their income and financial goals change, they may no longer have the kind of protection that’s right for them. Term life insurance provides coverage for a specific length of time. The beneficiaries receive the death benefit only if the policyowner dies before that term is up, so you may still me underinsured.

By contrast, a permanent (or whole) life insurance policy costs more because it guarantees a death benefit to your beneficiaries when you pass away at any age, as long as you maintain your policy. It may also enable policyowners to accumulate cash value that can be used to help meet their retirement and other long-term accumulation goals. If you currently have a term life policy, but wish to leave a legacy to your heirs (or a favorite charity), you may not have the type of coverage you need.

Conclusion

Underinsurance is common in U.S. households. To be sure your family has the protection it needs, review your coverage regularly to ensure that you have both the amount and the type of policy that’s right for you.