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Key takeaways:
- As life changes, so does your need for life insurance. Check regularly to make sure you’re not underinsured.
- If any of these nine things apply to you, you may want to increase your coverage to avoid putting your family at financial risk if you die.
- It’s also possible to be overinsured, which means you’re paying for something you don’t really need.
Life insurance is easy to forget about it once it’s in place, but just like any other kind of insurance, it’s important to review regularly. As your life changes, so does your need for coverage. And if you find yourself underinsured, you could be putting your family at risk if something happens to you.
Who needs life insurance?
Certainly, if you have a family that relies on you for support, you need life insurance. And even if you’re single, life insurance can still add value by covering the cost of your funeral expenses, which could add up to thousands of dollars. Plus, if someone has co-signed loans for you, life insurance will keep them from being stuck with the debt after you’re gone.
What does it mean to be underinsured?
When you have life insurance but it’s not enough to cover the financial needs of the people you leave behind, you are underinsured. If your family relies on you for support, make sure you leave them with enough money to cover expenses without your income.
9 Signs you may be underinsured
If any of these situations apply to you, you may want to consider increasing your life insurance coverage.
1. Your pay has increased over time
It’s natural to find that a family’s lifestyle changes as income changes. So, if you earn more money than you used to, consider increasing your life insurance amount to make sure your family can carry on without you, without having to make drastic cutbacks.
2. You bought a new home
A new home typically means a new mortgage. Your life insurance should be enough to pay off your outstanding mortgage balance. If it cannot, you need to increase your coverage.
3. You added children to your family through birth or adoption
When your family grows, so does your need for more insurance coverage. Kids need money for daycare, orthodontics, sports, weddings, college, and much more. And those expenses add up when your family grows. Make sure expenses for all your children are covered.
4. Your spouse isn’t insured
Think a stay-at-home spouse doesn’t need life insurance, just because they don’t earn wages? Think again. If something happens to him or her, you may need to pay for things like childcare, house cleaning, meal prep, and more, just to keep things going. Life insurance can cover all that.
5. You only have employer-provided coverage
If you lose your job or switch employers, this insurance often goes away. Plus, group life policies offered by your employer typically only cover one to two times the amount of your annual salary, which is usually not enough to adequately care for your family.
6. You never actually calculated how much you need
How much is enough? First, total up your debts and mortgage, then add several years’ worth of your income to cover annual living expenses; this will help your family meet their daily needs, at least for the first few years. Then add enough to send the kids to college. Finally, include enough to cover medical bills and funeral expenses.
7. Your life insurance amount doesn’t cover your debts
If this is the case, take steps now to add more coverage. Otherwise, your family will be burdened trying to make ends meet during a time when they’re also struggling to get by without you.
8. You haven’t reviewed your policy in years
Once it’s in place, life insurance is easy to forget about. But consider how much your life has changed over the past five or 10 years, then match your current financial situation against your insurance coverage. There’s a good chance they don’t line up. You’re likely paying for either too little or too much coverage, and neither is a good use of your money. A review can be quick and easy, especially with the right insurance broker.
9. Your financial goals have changed
There are dozens of reasons your goals and corresponding insurance needs change over time. For example, if you’ve purchased a vacation home, make sure your life insurance covers both mortgages. You may want to consider a special policy to provide your children and grandchildren with an inheritance or funds that could provide long-term care or retirement benefits for your spouse. Life insurance can be configured in many ways; make sure yours matches your financial goals.
What happens if you’re underinsured? Is it possible to be overinsured?
If any of these nine things apply to you and your family and you find that you’re underinsured, don’t delay. Take immediate steps to bring your life insurance in line with your current financial needs.
On the flip side, it is possible to be overinsured. If you have paid off your mortgage, reduced your debts, you’re an empty nester or have no one who relies on you for income, or if you’ve downsized overall, you may not need as much life insurance as you currently have. Avoid paying for something you don’t really need.
Don’t let life insurance slide
It’s common for people to lose track of their insurance coverage over time. But don’t wait until it’s too late. It takes just a moment to update your life insurance coverage. Give yourself peace of mind and make sure your family is protected.
