Risks of inadequate life insurance coverage
Let’s start this conversation with a hard fact, The overwhelming majority of Americans are underinsured. Yes, this is a blanket statement but it’s not untrue. Some coverage is easier to think about in this regard. If your underinsured on your vehicle and are in an accident you could being paying thousands or tens of thousands out of pocket to fix it. This impacts you directly so it seems a more important coverage to increase in the moment. Your home is broken into and someone steals expensive jewelry or watches, again your normal home policy may not cover this and it impacts you personally so you it makes sense to inquire about ensuring everything in your home is covered. However the coverage most people don’t think about once they have it is life. Whether it’s a group policy through work, a term policy or even a whole life policy you may have gotten at a different time in your life. Life coverage doesn’t impact you immediately, in fact in terms of claims it never impacts your directly. But it is the coverage that absolutely will impact those you love the most. So why do people so often let their life coverage slide? What are some of the possible problems that can arise from inadequate life coverage? Below we will cover some of the things often forgotten but so very important to remember when considering whether or not it’s time to take a second look at your life policy.
Most peoples policy does not have an adequate coverage amount.
What is the main purpose of life insurance? Well there are several, End of life expenses being the most obvious, Income replacement and lastly future large expenses. A rule of thumb when considering how much life insurance coverage you should be shopping for is between 10 to 15 times your annual income. However a policygenius survey of people with life insurance coverage found that nearly 75% of people who currently carry a life insurance policy do not have enough coverage to adequately support their family after their death. Another survey by LIMRA states that as many as 4 out of 10 people do not carry enough coverage to actually help their family cover all post life expenses.
Coverage term is to short
While a shorter term policy will cost you less now and for the duration of your policy it will almost certainly cost you more in the long run. While someone in their 30’s or 40’s may pay very little for a 10 year term now, what happens when that term is up. Obviously most people will not putting that insurance to use during that term, and when they return in ten years to look into a new policy the rates will be dramatically more expensive than they were at the start of their last term. On average the cost of life insurance increases 4.5% - 9% for each year that passes by, so for someone looking to purchase coverage for the young family it is certainly beneficial to consider the long game. Other things you should be considering once you start looking that far out, How long is your mortgage? How many years till your children are in college? How much will that college cost? How much debt do you currently have? The point of your coverage is to alleviate any financial burden your family may incur provided you are not there to assist them. So remember to think far ahead and consider all of the if’s and maybe’s, Short term coverage could leave your family on the hook for all this and more when that was never your intention.
Wrong type of coverage
Lapse in whole life
While whole life is typically considered more solid ground to stand on than term insurance there are certain things to consider here as well. Whole life insurance is on average 5 times more expensive than term life. While the reasons for this are obvious, nearly 30% of all whole life polices lapse due to non-payment within the first three years and 45% lapse within 10 years due to non payment. Yes having a long term plan for your family is important. But thinking responsibly is the most important thing you can do. If you’re unsure about making the potential whole life payments there is always a way to figure out an adequate coverage at a more comfortable price now and revisiting your long term goals when the need arises. Whats most important when considering your life coverage is that the policy will be adequate to fill the needs of your loved ones when they need it, and that isn’t possible if your payments are to high to make.
Final Expense coverage is to little
A fairly common type of life coverage is final expense coverage. When most think about their final expenses they consider their funeral bills however often glanced over are any possible medical bills that could accompany that. Final expense also tends to be more expensive than a term policy as well as having coverage limits that other policies often do not have. For these reasons even though you think you have the coverage you need to at least alleviate this final expense from your families shoulders, often times the end up footing part of the bill anyways.
Employer based group life coverage is not enough coverage
Some people rely on an employer provided life insurance policy. While undoubtably this is a great starting point for most people, it typically leaves much to be desired in terms of actual coverage. While most policies provide less the high end of these coverages typically max’s out at 250,000 dollars of coverage which simply isn’t enough coverage. Another things people fail to consider about this is a coverage gap that comes if you switch your employer or stop working all together. While your new work place may also offer a similar benefit, during the time in which you are not eligible for that coverage you will have no protection for your family. Based on these two glaring facts we believe that employer based life coverage is a great starting point or supplement to your own personal life coverage, but is typically not adequate to cover the actual post life financial obligations placed on your family or beneficiary’s.
What are the actual risks to my loved ones if I don’t have enough coverage
While most people are quick to think about the big impacts of inadequate life coverage such as college expenses etc.. there is a very real risk of there being much smaller much more immediate consequences of inadequate life coverage. The main point of life coverage is to be an income replacement once you are no longer to provide for your family. Without that extra income they could very quickly lapse in mortgage or rent or even struggle to purchase necessities such as food or pay for things like internet or utilities. While these are the more immediate concerns for people who loose a bread winners income with no or to little replacement you need to think of some of the other long term repercussions as well, things like eventually loosing your estate to debt collectors if your family is unable to pay off your previously incurred debt. Even Immediate expenses are often more than most people think, not considering medical bills (which depending on what your health insurance looks like can often be tens of thousands of dollars themselves) end of life expense’s very often exceed 10,000 dollars. That is 10,000 out the door the first week you are gone. Most people hope to leave a legacy behind, not debt, hardship and questions. This is why ensuring your coverage is enough coverage for the people you leave behind is so important. There are always options that you can ask your agent about to get coverage most tailored to your current insurance needs and costs. Whats most important is to remember that no matter what your current situation is your doing yourself, your family and your legacy an injustice by not having this conversation with your agent today!
