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Just because you have a life insurance policy doesn't mean you're fully covered. In fact, many are underinsured without even realizing it.

Getting quality life insurance is vital to providing your family with a secure financial future. This coverage allows families to maintain their standard of living or reduce some of the financial burdens if you pass away unexpectedly.

The tricky part is determining if your life insurance policy is adequate for your family’s needs — this threshold for quality coverage changes with different life changes and additions. Many people don’t realize their policies are leaving them uninsured. Policyholders should always be aware and ready to scale their coverage as life changes.

Below, I’ll discuss determining your required insurance coverage and how to know if your life insurance is underinsured in certain situations.


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Determining the Coverage You Need

The first step in finding adequate life insurance coverage is determining the amount of money your family will need in the event of the loss of a parent. Consider the financial obligations the beneficiary would be responsible for, such as mortgage or rent, utilities, groceries, clothing, college tuition, and any debt payments.

Once you’ve asked yourself how much money your family would need to maintain their quality of life, you then need to factor your contribution to the family’s expenses and income. Another thing to consider is the cost of center-based child care or the monetary value of the hands-on child care you provide at home.

After you’ve calculated these numbers and determined the money your family would need after the loss of a parent, you can compare policies. I like Quotacy for this since they make it easy to compare policies. It’s important to do this early, because of the many factors into policy costs, age is an important determining factor.

Some people try to get into great shape and take care of their health before they look into plans, but that still means they’re aging as they wait to decide on a plan. Because adjustments to your policy will always be necessary, it’s best to lock in a rate as early as possible and make the changes needed as life occurs.

It’s advised that families consider the scope of insurance needs and buy it early in life. As unexpected life changes occur, policyholders can decrease their coverage in relation to income as their children grow and rely less on their parent’s income.

Signs You’re Underinsured

After you purchase an initial policy, be aware that there will be many life events that require you to scale your coverage. Choosing not to do so will result in your family being underinsured in the event of an unexpected loss. We’ll cover these life events below.

You Have Accrued Substantial Debt

If you have accrued debt from private student loans, medical bills, mortgages, or spouses or parents that cosigned on loans with you, your current policy may leave you underinsured. In the incident of cosigned loans, the remaining cosigner is liable for paying the balance in full if the original borrower dies.

The inability or failure to do so can ruin a good credit score and put the cosigner in legal trouble. There is an exception when it comes to repaying federal student loans; however, in most cases, private student loans are still required to be repaid. Purchase enough life insurance to cover your debts in full to protect your cosigner in case you pass away sooner.

You Have New Financial Goals

When initially purchasing a life insurance plan, many couples choose budget-friendly policies due to their low cost, especially in the early days of building a family. These plans are considered “term life insurance.” As income grows, financial goals change to reflect those new finances.

In this instance, their current policy won’t be enough in the event one of them passes. What’s considered “term insurance” only provides enough coverage for a particular duration of time. This means that the beneficiary only receives a death benefit if a policy owner dies before the term expires.

Instead, families with growing financial goals will benefit more from permanent life insurance policies. When finances have increased, and families can afford these policies, it allows the death benefit to be received when a policyholder dies at any age. These plans sometimes allow policy owners to accrue a cash value over time that can be used to apply to retirement plans and other long term financial goals.

A policy that seems sufficient for a family in the early days will become much less adequate as they grow financially. If your future goals include providing for your family’s legacy, memorial donations to charities, or any other gifts, your original life insurance coverage will not offer these monetary goals.

You Have a Growing Family

If you’ve recently had a new addition to your family and haven’t changed your life insurance policy to reflect that, you are currently underinsured. Always look into upgrading the scope of your life insurance when your family has had any change in size. Recent estimates suggest that it costs an average middle-class married couple approximately $234,000 to raise a child to 18 years of age.

If they decide to go to college, that will be an additional amount of money. Some people wish to cover other life milestones such as college, braces, weddings and more. Those events and expenses should also be factored into your death benefit.

Your Life Insurance Policy Is Through an Employer

Of the 60% of Americans that hold life insurance policies, approximately half of those plans are underinsured, according to LIMRA, a global financial researcher. They state that many households choose group life insurance plans, which often don’t provide enough financial security into old age and leave coverage gaps of up to $200,000 or more.

While it’s a great benefit to have employer-provided life insurance, the amount provided is typically not enough to provide for a family if a parent passes while employed. These group life insurance offers are also not transferable, meaning that if you lose your job or quit, you can’t take that policy with you. That leaves you needing to buy a new private plan when you’re older and in retirement.

On their website, Bestow, a life insurance provider, points out that many of the employer-provided policies don’t even cover more than a year’s worth of salary. Since age affects your premium costs, it’s wise to opt-out of the employer-provided policies sooner than later. Commonly, health conditions that develop before you leave your job may make you ineligible for low-rate plans or private policies.

Related: Bestow Review

Your Income Has Increased

It is always a good thing to see a boost in income. If your family counts on your income alone to cover living expenses, you’ll need to scale your life insurance policy to reflect that. When your income increases significantly after you’ve purchased a policy, you’ll be left underinsured if you don’t.

A life insurance policy is intended to provide your family with enough financial security that remaining family members could maintain their quality of life and lifestyle choices after the loss of a parent. Insurance providers such as Policygenius offer online consultation services to assess your coverage needs with a free quote when you need to change policies.

It’s imperative to consider lifestyle costs when determining what coverage is enough for you. A million-dollar policy sounds substantial, but whether it’s enough for you depends on the amount of money spent per year.

Your Spouse Is Not Insured

If your spouse is a stay-at-home parent with a young child, you may think that because they aren’t bringing in any income that they don’t need life insurance coverage. Although they do not produce any income, the onus would still fall on the working spouse to provide means for childcare services. That means paying for a nanny or daycare. When there is a loss of one parent that covers domestic responsibilities, expenditures for home maintenance, meals, and tutors may be necessary as well.

The cost of child care depends on the state you live in. Studies show that the average cost of a daycare center ranges from $500 to $1,500 a month. Although your stay-at-home spouse isn’t producing income, you’ll be left underinsured if you don’t adjust your policy. By doing so, you’ll protect the earning spouse’s ability to maintain their workload without cutting hours or changing to a less demanding job that allows them to be home more.

Bottom Line

Having a life insurance policy that leaves you drastically underinsured is a common occurrence in many households.

With many changes in work, income, debt, and family size, there will always be a need to adjust your policy after purchasing. Many online insurance providers such as Fabric and Ladder make it easy to securely check free quotes in minutes when considering your policy options.

To be sure your family is covered with the adequate financial security your lifestyle requires, always review your plan regularly to ensure that you are covered with the correct amount and policy type that’s right for you.

Author Bio

Total Articles: 124
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016.

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