5 Signs Your Life Insurance Coverage May Not Be Enough
Your life insurance coverage should be sufficient to close the gap between your family’s financial needs and the resources already available to them.
Shanti
8/20/20263 min read
5 Signs Your Life Insurance Coverage May Not Be Enough
Purchasing life insurance is an important step toward protecting your family financially. However, simply having a life insurance policy does not always mean that you have enough coverage.
Life changes over time. Your income may increase, you may have children, purchase a home, or take on additional financial responsibilities. If your life insurance coverage is not updated to reflect these changes, your family could face a serious financial shortfall if you die unexpectedly.
Below are five important signs that may indicate your life insurance coverage is less than what your family actually needs.
Your Only Life Insurance Coverage Is Through Your Employer
Many employers provide group life insurance as part of their employee benefits package. This coverage is valuable, but it is usually not enough on its own.
Employer provided life insurance is often equal to one or two times your annual salary. This amount may be sufficient to cover final expenses and some short term debts, but it will probably not meet all of your family’s long term needs, especially if:
You have a mortgage or significant debts.
Your children depend on you financially.
You plan to pay for your children’s education.
Your family relies on your income to cover everyday living expenses.
Another important consideration is that group life insurance is usually tied to your employment. If you resign, lose your job, retire, or change employers, you may lose your coverage, or continuing it may become expensive.
Having an individual life insurance policy can provide coverage that remains independent of your employment.
Your Income Has Increased
An increase in income often comes with changes in lifestyle and greater financial obligations. You may purchase a more expensive home, send your children to private school, save more for college, or take on higher monthly household expenses.
If you purchased your life insurance policy when your income and expenses were much lower, the policy amount may no longer be sufficient to replace your current income.
The purpose of life insurance is not simply to pay for funeral costs or a few initial bills. Adequate coverage should help your family manage essential expenses and important financial goals for a reasonable period of time.Your Stay at Home Spouse Does Not Have Life Insurance
A common mistake is assuming that only the person who earns an income needs life insurance.
A stay at home spouse may not receive a salary, but they often provide highly valuable services such as caring for children, providing transportation, cooking, managing the household, or caring for family members. If that spouse were no longer present, the family might have to pay a significant amount to replace those services.
Therefore, when calculating your family’s life insurance needs, you should consider more than earned income. The value of unpaid services should also be included.
You Have Had a Child
The birth or adoption of a child is one of the most important times to review your life insurance coverage. Each new child brings many years of additional expenses, including:
Housing and food
Childcare
Medical care
Clothing and everyday activities
School and college expenses
If you have not increased your life insurance coverage since adding a child to your family, your current policy may not be enough to meet the child’s long term needs.
Both parents, including a parent who does not work outside the home, should evaluate their need for life insurance.
You Have Purchased a New Home
A mortgage is often one of a family’s largest financial obligations. If you purchased a home or took out a larger mortgage after buying your life insurance policy, you should determine whether your policy provides enough coverage to help pay the mortgage.
If one spouse dies, the resulting loss of income may make it difficult for the family to keep the home.
Adequate life insurance coverage can help surviving family members continue making mortgage payments, pay off part of the remaining balance, or give them enough time to make decisions about the future of the home.
How Much Life Insurance Do You Need?
There is no single amount that is right for everyone. General guidelines such as ten times your annual income can provide a starting point, but they cannot replace a calculation based on your personal circumstances.
For a more accurate estimate, consider the following:
The remaining balance on your mortgage and other debts
The number of years your family will need your income
The cost of raising and educating your children
The cost of replacing the services provided by a stay at home spouse
Final and medical expenses
Existing savings and assets
Employer provided life insurance and any other life insurance policies
Your life insurance coverage should be sufficient to close the gap between your family’s financial needs and the resources already available to them.
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