The risks of not having enough life insurance coverage

A majority of Americans are underinsured — but what does this mean for your loved ones and how can you fix it?

Nupur Gambhir


Nupur Gambhir

Nupur Gambhir

Life Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius and licensed Life, Health, and Disability agent in New York.

Updated September 24, 2020|7 min read

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Life insurance is meant to protect your family’s financial security when you die. But having just any life insurance policy doesn’t cut it. A policy lacking in coverage or a long enough term length can leave your loved ones struggling financially after you die.

Finding the sweet spot between the right amount of life insurance coverage and term length makes all the difference when it comes to your family’s financial assurance. Read on to learn about what you can do to make sure you're purchasing a life insurance policy that adequately protects your loved ones.

Key Takeaways

  • A majority of Americans do not have enough life insurance coverage or a long enough policy term length to adequately protect their dependents from financial hardship if they die

  • The amount of life insurance coverage you purchase should account for the income you provide, any debts and liabilities you have incurred, and end of life expenses

  • While a shorter-term length is cheaper than a longer-term length, purchasing a new policy later can result in costlier premiums or a coverage gap

  • Shopping around is the best way to find a life insurance company that gives you the best rates and coverage for your individual circumstance

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What can leave you underinsured

Because your life insurance coverage amount is an income replacement, you want to make sure that the amount that is paid out after your death is proportionate to the financial support you offered your loved ones when you were alive. But a majority of Americans who have a life insurance policy don’t have enough coverage to sufficiently support the people their life insurance policy is meant to protect.

Low coverage amounts

Most people should purchase a policy that offers coverage of at least 10 to 15 times their income, but this amount can be even higher based on individual circumstances. But according to Policygenius research, approximately three-fourths of people who have an active life insurance policy don’t have enough coverage to adequately support their family after their death, and according to a recent survey by Life Happens and LIMRA, four out of 10 households would be unable to pay immediate costs if the primary breadwinner passed away.

Too short life insurance term length

Even though a 10-year policy is going to cost you less than a 20-year policy now, a shorter-term length policy could still end up seriously costing you.

For starters, the cost of purchasing life insurance increases on average by 4.5-9% every year you age. So if you plan on purchasing a 10-year policy now and then another 10-year policy once your original policy’s term length is up, you’ll see an exponential amount for life insurance as you get older. Additionally, a change in your health could lead to even higher than expected premiums or complete ineligibility for life insurance altogether.

Alongside this, your life insurance policy should last as long as your debts and should cover your future anticipated costs. If you have a newborn whose college tuition you plan on paying, a mortgage of 30 years, or any other long-term foreseeable costs, a short-term policy can leave your loved ones vulnerable to financial hardship if you pass away.

Wrong type of life insurance policy

Even with the best of intentions, purchasing the wrong type of life insurance policy can pose major risks to the financial security of your loved ones. Some life insurance policies are too expensive to maintain or don’t offer a high enough coverage amount to account for necessary expenses.

Whole life insurance lapses

While a whole life insurance policy may seem attractive — you don’t have to worry about your term length running out and losing life insurance coverage — a whole life insurance policy’s exponentially high costs often lead to the policy lapsing and a lack of life insurance coverage anyway.

Whole policies are five to 15 times more expensive than term life insurance policies, which leads to 30% of whole policies to be given up within the first three years and 45% of whole policies to be given up within the first ten years.


Final expense life insurance is a small coverage amount

Some people obtain coverage for their final expenses, such as funeral costs or final medical bills, by purchasing a final expense life insurance policy, though it tends to be more expensive than traditional term life insurance policies and has limitations on the coverage amount. A final expense policy that doesn’t pay out enough can still leave your family footing the bill.

Group life insurance isn’t enough coverage

Some people rely on employer-sponsored life insurance for their life insurance policy, though for the most part they are inadequate and the median amount of coverage provided is a maximum of $250,000. If you make an annual salary of $100,000, this provides less than three years of financial support to your beneficiaries, or the people who receive the life insurance pay out.

Relying on employer-sponsored life insurance is another scenario that runs the risk of a coverage gap. It’s not portable, so if you change or lose your job you’re no longer covered.

Employer-sponsored life insurance can be a good supplement to a life insurance policy that you already have in place, but it should rarely be your only form of life insurance coverage.

What happens if you don’t have enough life insurance coverage

The consequences of a life insurance policy that doesn’t offer sufficient support can be devastating for your loved ones. While the long-term impact on larger expenses might be more apparent, they could also face financial hardship in their everyday lives almost immediately.

Can’t keep up with everyday expenses

You want your life insurance policy to provide for your family’s basic needs. A repercussion of too low of a coverage amount is that your loved ones could lose cash flow imperative to their livelihood. Without your income or an adequate income replacement, your dependents could struggle to cover food, bills, and all other necessary expenses.

Loss of long-term financial plan

Distinguishing the length of your life insurance policy necessitates anticipating future costs. If you have a 30-year mortgage and a 20-year life insurance policy, you are once again creating a scenario where your dependents may either end up paying your debts or losing part of your estate to a debt collector.

Below are some of the average costs that someone might see in Ohio, which has a cost of living that is 11.1% less than the national average.

Even with a below-average cost of living, you would need at least a $1 million dollar life insurance policy to ensure your family’s financial health for 10 years after you die.

Inability to pay for final expenses

End of life expenses are costly and can come to roughly $7,000 — sometimes costing as much as $10,000. While you want to ensure you’re leaving behind enough of a life insurance coverage amount to compensate for the loss of your income, a low coverage amount might be prohibitive when your family plans your funeral.

Debts and assets might be seized

Mortgages, loans, and any other financial liabilities you have incurred are going to impact how much life insurance coverage you’ll need — especially if you have any loans that have been co-signed. If you die and your life insurance policy doesn’t offer enough of a coverage amount to pay off your debts, they will be liable for any co-signed expenses.

Even if you are the only borrower on a loan, not having enough life insurance to cover your debts can have major repercussions for your dependents. Often, outstanding debts have to be sorted out in a probate court. If your estate doesn’t have enough money to pay off the debt, the court could sell your belongings — which could include the house that your dependents live in or implicate any other part of your estate that they rely on.

How to make sure you have enough coverage

The best way to ensure that your loved ones aren’t struggling financially after you pass away is, of course, to purchase the right policy. There are a few key ways to ensure that you’re getting a life insurance policy with optimal coverage and term length for your individual circumstance.

Policygenius life insurance calculator

If you’re considering something along the lines of $500,000 policy for the cheaper premiums, it may not offer the type of financial support your family needs based on your income. If you make $200,000 a year, then a lump sum payout of $500,000 may only last your beneficiaries a little over two years, not accounting for inflation and unexpected expenses. The Policygenius free insurance coverage calculator can help you determine exactly how much life insurance you need.

Buy term life insurance

Because term life insurance is the more cost-effective option compared to whole life insurance, purchasing term life will enable you to get more coverage at a lower cost. You can apply for more coverage if you didn’t get enough from the get-go through your life insurance company, which may require some additional underwriting. Additionally, you could purchase a new policy altogether.

Compare quotes

Each life insurance company treats various circumstances differently and finding an affordable policy that accommodates your individual needs requires shopping around. Policygenius advisors work with you for free to determine your optimal coverage and term length at the best possible price. By comparing rates across multiple life insurance companies and working with you throughout the application process, they’ll ensure you receive the best policy at the most competitive rate.

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