Updated: Aug 15
Life insurance is meant to protect your family’s financial security when you die. But having just any life insurance policy doesn’t cut it. A policy lacking in coverage amount or a long enough term length can leave your loved ones struggling financially after you die.
What happens if you don’t have enough life insurance coverage?
The consequences of a life insurance policy that doesn’t offer sufficient support can be devastating for your loved ones. While the long-term impact on larger expenses might be more apparent, they could also face financial hardship in their everyday lives almost immediately.
Can’t keep up with everyday expenses
You want your life insurance policy to provide for your family’s basic needs. A repercussion of too low of a coverage amount is that your loved ones could lose cash flow imperative to their daily living. Without your income or an adequate income replacement, your dependents could struggle to cover food, bills, and all other necessary expenses.
As an example, many employees who make $100,000 a year have workplace insurance coverage in the amount of $250,000. While this sounds like a large dollar amount, that would only cover up to 3 years of living expenses. If you have kids who are 8 and 10 years old, that only supports them till ages 11 and 13. What happens after the insurance money is gone?
Loss of long-term financial support
Distinguishing the length of your life insurance policy necessitates anticipating future costs. If you have a 30-year mortgage and a 20-year life insurance policy, you are once again creating a scenario where your dependents may either end up paying your debts or losing part of your estate to a debt collector.
Below are some of the average costs that someone might see in Illinois, which has a cost of living that is 6.6% less than the national average.
Average mortgage = $234,000
Average cost of raising a child until 18 = $233,640
Median salary or income replacement = $63,007
Average annual cost of retirement = $48,914
Even with a below-average cost of living, you would need at least a $1 million dollar life insurance policy to ensure your family’s financial health for 10 years after you die.
Your home might be seized
Mortgages, loans, and any other financial liabilities you have incurred are going to impact how much life insurance coverage you’ll need — especially if you have any loans that have been co-signed. If you die and your life insurance policy doesn’t offer enough of a coverage amount to pay off your debts, they will be liable for any co-signed expenses.
Even if you are the only borrower on a loan, not having enough life insurance to cover your debts can have major repercussions for your dependents. Often, outstanding debts have to be sorted out in a probate court. If your estate doesn’t have enough money to pay off the debt, the court could sell your belongings — which could include the house that your dependents live in or implicate any other part of your estate that they rely on.
Protect your family by getting the right coverage.
Finding the sweet spot between the right amount of life insurance coverage and term length makes all the difference when it comes to your family’s financial assurance. Read on to learn about what you can do to make sure you're purchasing a life insurance policy that adequately protects your loved ones.
Most people should purchase a policy that offers coverage of at least 10 to 15 times their income, but this amount can be even higher based on individual circumstances. If you earn $200,000 a year, you should have $2 to $3 million of life insurance.
Low coverage amounts
But according to Policygenius research, approximately three-fourths of people who have an active life insurance policy don’t have enough coverage to adequately support their family after their death, and according to a recent survey by Life Happens and LIMRA, four out of 10 households would be unable to pay immediate costs if the primary breadwinner passed away.
Wrong type of life insurance policy
Even with the best of intentions, purchasing the wrong type of life insurance policy can pose major risks to the financial security of your loved ones. Some life insurance policies are too expensive to maintain or don’t offer a long enough period for necessary expenses.
For example, a 30 year mortgage and a 15 year term life policy creates a situation where your family doesn’t have sufficient coverage.
You may also want to consider an insurance policy that has a long-term care rider. Be sure to ask your insurance agent to review your budget and whether you can afford to sustain the cost of your policy.
What to do next
The best way to ensure that your loved ones aren’t struggling financially after you pass away is, of course, to identify all of your financial risks and forecast your family’s needs with the help of a financial advisor. Then, be sure to purchase the right policy where you can afford the premiums.
Is your family adequately protected with life insurance? How about helping future generations meet their financial goals? If your financial situation has changed such as taking on more debt or having a higher income, you should review your coverage. If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.