Don’t Get Caught Short: The Risks of Being Underinsured — And How You Can Avoid Them

shutterstock_97146533Life insurance should provide its policyholders with the peace of mind that comes from knowing loved ones will be financial secure after their death. However, according to the Life Insurance and Market Research Association, just 44% of U.S. households have individual life insurance plans, and of those, 40% think they are underinsured. Nationwide Financial found that while the average consumer will earn around $1.5 million before they retire, the average life insurance policy benefit is just $300,000. There are several risks to being underinsured:

  • Not being able to afford a mortgage after the loss of a primary breadwinner could result in the loss of your home or significant downsizing.
  • Tapping retirement (such as IRAs) and savings to make up for the loss in income can negatively impact your future financial health.
  • College tuition, health care and other expenditures beyond the cost-of-living may become harder to manage—or altogether unaffordable.
  • It can take 4-5 years to come back from the financial hardship caused by the loss of an income. Some households never completely recover.

An adequate life insurance policy will play a large role in avoiding these unsettling scenarios. Before you decide on your benefit amount, there are numerous items to take into consideration.

  • Determine how many years you have before retirement, and multiply that by your current annual income.
  • If you get health insurance through your employer, how will your survivors be insured after your demise? If your spouse is working and a decent health insurance plan is available, this may not be a concern. But if your spouse isn’t working and you have children, you will need to take health care and possibly even long-term care into account.
  • Do you have investments that will ensure a comfortable retirement for your spouse? If not, factor that in.
  • Consider the ages and needs of your children. Younger offspring will need considerable care for more years, while older children are likely to face college tuition fees. Dependents with special needs require specific services that need to be covered as well.

In short, a long, hard look at your entire financial situation—including any future expenses—is necessary to avoid becoming underinsured. Consider what your needs are and what they will cost—and go through the “How Much Do I Need?” worksheet on the SelectQuote website to make sure you haven’t missed something. You can always talk to a customer service representative about your options as well.

They say luck favors the prepared; make sure your survivors are ready to tackle any challenges without you.

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