Do You Have Enough Life Insurance?

Life insurance is usually last on the list of important-but-necessary items people want to spend money on, because, let’s face it, no one wants to dwell on the circumstances in which it could come in handy. Now, in the wake of the Great Recession, people have even less insurance than before, which leaves families unprepared to cope with potential tragedy.

The gap between the amount of life insurance Americans actually have and the amount they think they need has now widened to about $320,000, according to a recent survey of 1,004 respondents by New York Life Insurance. Respondents on average said they needed about $540,000 worth of insurance, but they only had $220,000 last year.

Similarly, between 2004 and 2010, the number of people with life insurance dropped from 78 percent to 70 percent, says Bob Kerzner, CEO and president of LIMRA, a financial services industry group. “So three in 10 households in the United States have absolutely no life insurance whatsoever,” he says. He attributes the large drop partly to the recession and the fact people don’t – or at least think they don’t – have the money to afford a life insurance policy.

Kerzner says people tend to think that life insurance is about three times more expensive than it actually is. “There’s the perception that it costs more than it does, so they think it won’t fit into their budget, even when it might,” he adds. LIMRA surveys have also found that about half of households say they believe they don’t currently have enough life insurance.

Millennials, who are now in their 20s and early 30s, are particularly likely to be underinsured. A LIMRA survey released last month found that if the primary breadwinner were to die, six in 10 Gen X and Gen Y Americans said their households would suffer financially, versus just over one-third of baby boomers. The survey, based on 6,000 respondents, found that Gen Y is also less likely to have life insurance compared to older generations. Just one-third have individual life insurance policies, compared to about half of baby boomers.

“Young people in general tend to assume they’re absolutely invulnerable,” says Steven Weisbart, chief economist for the Insurance Information Institute. But young adulthood is also an ideal time to lock in low rates on policies, he adds. “When you’re young, it’s really cheap … This is a good time to buy,” he says.

Denise Flannery, senior vice president at Penn Mutual, says she thinks the insurance industry needs to do a better job explaining the benefits of taking out policies, especially at a young age. In addition to death benefit protection, certain types of policies can also offer the ability to build cash value over one’s lifetime, although the death benefits tend to be the primary reason people take out life insurance, she explains. “I try to make life insurance into something optimistic, that makes you feel good, because you’re doing a good thing,” she says.

She also points out that millennials are growing up; many of them now have family responsibilities that make life insurance particularly important. According to the U.S. Census Bureau, half of millennial women between ages 20 and 34 have at least one child, and over half of recent births to twenty-something mothers have not been first births. In other words, their families are growing quickly.

Do You Have Enough Life Insurance?

No one likes to think about death, but it’s pretty much a guarantee. Whether you like it or not, you are going to die. That means you need to be properly insured so that your survivors can be financially secure after you kick the bucket. Although people know they aren’t going to live forever, many are still resistant to buying life insurance. Some haven’t even purchased life insurance at all. Despite your best efforts, neglecting to buy life insurance will not make the Grim Reaper go away. He will find you eventually, and he won’t ask how much insurance you have before he takes you.

A recent Bankrate study found that 37% of Americans with children who are under 18 years old do not have life insurance. However, among those who do have life insurance, the picture doesn’t look any better. Roughly one-third of parents who have life insurance have no more than $100,000 worth of protection. This is barely enough to protect a family.

Income not a factor
Income does not seem to be a major factor when it comes to coverage. Surprisingly, even survey respondents who reported making an annual salary of more than $75,000 said they had less than $100,000 worth of life insurance. Doug Whiteman, Bankrate’s insurance analyst, estimates that more than 20 million households with young children either don’t have life insurance or don’t have enough.

How much life insurance do i need?
The amount of life insurance you’ll need to purchase depends on your particular life situation. However, there are some basic guidelines you can follow.

“There are many rules of thumb regarding how much life insurance is enough,” Whiteman said. “Ultimately, it’s a personal decision that’s based on a range of factors including your debts, mortgage, potential college costs for your children (that’s if you have any), and likely burial expenses. Bankrate has a great life insurance calculator to help you come up with the right amount.”

Bankrate says how much life insurance you purchase can also depend on factors such as your age, the ages of your spouse and children, and your income. Know that your premium rate will rise as you age. Term life insurance, which covers a specific number of years, may be the best way to manage risk and keep future options for life insurance available. It’s important to consider the ages of your spouse and children because this will assist you with deciding how many years of income replacement will be necessary when you pass away.

Choosing a policy
Your life circumstances should be kept in mind when deciding on a whole-life, term, or combination policy.

“One tactic I recommend is to separate the planning for your spouse from the planning for your children, because the timeline for needing coverage may differ. If you have a 15-year-old child, then you really only need a 10-year term policy to see the child through college. But if you’re 45 and plan to work for another 20 years, your non-working spouse is going to need a 20-year life insurance policy, at least,” insurance literacy advocate Tony Steuer told Bankrate.