Mind the Gap: Why Your Coverage May Be Short of What's Necessary

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Peace of mind is truly priceless. This fact is often part of the motivation for buying life insurance. When the unexpected occurs, like a death in the family or a debilitating illness, the knowledge that you have a life insurance policy to fall back on in that time of need makes the unsettling nature of the unknown more manageable.

But according to a newly released poll, many Americans may not have the safety net they think they do.

As many as 60 million households in the United States are underinsured. That’s based on a projection from analysis conducted by LIMRA and Life Happens. The average size of their coverage gap? Approximately $200,000.

While the reason behind the trend is unclear, it may be related to people underestimating the costs of living. In a separate report also released by LIMRA, more than one-third of men said they believed the group life insurance they had through work was sufficient for their needs. But as data from the Bureau of Labor Statistics shows, the median amount of life insurance offered by workplaces runs around $20,000 — meaning the average gap is 10 times the value of a standard group life insurance policy.

“44% wrongly guessed that the cost of a 20-year term life insurance policy was $1,000 in annual premiums for a 30-year-old.”

Another potential explanation for why Americans don’t have enough coverage is believing that buying more is not in their budget. Indeed, a majority of respondents polled in LIMRA’s 2021 Insurance Barometer Study were way off the mark when asked what they believed was the average cost of a term life insurance policy. Among millennials, 44% guessed that the cost of a 20-year term life insurance policy was $1,000 in annual premiums for a 30-year-old. In actuality, the typical price runs around $165.

Numerous families hard hit financially by COVID
Financial uncertainties — or income expectations that weren’t realized —can also have an influence on life insurance protection and whether one may need more of it. Many people encountered these financial adversities amid the COVID-19 pandemic and are now coming to grips with some of those realities.

Among non-retired adults who participated in a recent poll conducted by the Pew Research Center, 62% said they’d either lost a job or saw their wages fall over the course of the pandemic. Of these individuals, 51% indicated it would now be harder for them to achieve their long-term financial goals.

And in a separate study done by the Secure Retirement Institute, just 50% of workers who were economically affected by the COVID-19 crisis are “confident” they are saving enough money to retire comfortably.

Whether it’s retiring early, saving money or contributing additional funds to a 401(k), many of the financial planning activities people had anticipated being able to do were compromised by COVID. Additional life insurance protection provides the extra layer of financial support spouses and children may require in the event of a sudden or unexpected death.

“Help Protect Our Families is designed to more forcefully address the ongoing life insurance coverage gap that exists in the U.S.”

It’s with these issues in mind that the life insurance industry is coming together to help families understand the coverage gap. Several life insurance trade associations and interest groups — including LL Global, the American Council of Life Insurers, Million Dollar Round Table, National Association of Insurance and Financial Advisors and the National Association of Independent Life Brokerage Agencies, Life Happens and Finseca — are participating in an initiative called Help Protect Our Families. Launched in February, the awareness program is designed to more forcefully and comprehensively address the ongoing life insurance coverage gap that exists in the U.S. and do what is necessary to close it. These efforts will involve a combination of continuing education, marketing, research and public outreach.

How can families accurately determine whether their life insurance plan is sufficient?
Like just about all kinds of insurance — be it homeowners, auto, renters and more — life insurance is a highly customizable product. What’s enough for one family may be entirely too little for another. As a general rule, though, the “10 times earnings” principle is a good standard to go by. This means that for whatever amount of money someone earns in a typical year, multiply the amount by 10. Thus, if a household’s earnings are a combined $300,000, 10 times that amount would be $3 million.

Paul Moyer, a life insurance agent and financial educator based in South Carolina, told The Balance that this method has proven to be an accurate formula over the years when life insurance agents have assessed their clients’ expenses and reliable income sources.

Another approach is called DIME. An acronym for “Debts, Income, Mortgage and Education,” DIME combines all of these financial considerations to get a ballpark figure of how much coverage is sufficient for a life insurance policy. As noted by The Balance, calculating DIME works like this:

Debts: Not including mortgages, add up what you have left to pay for all consumer loans (e.g. credit cards, auto financing, personal loans, etc.).

Income: Multiply how much money you earn in a year by the number of years your family would need you as its primary source of income. This may be affected by when you anticipate kids would start living on their own.

Mortgage: Consider how much of your home loan is still outstanding. You should be able to get an official document if you contact your mortgage lender directly.

Education: If you plan on paying for some or all of your kids’ tuition, estimate what the total cost will likely be for them to obtain a four-year degree. Tuition expenses rarely stay the same from one year to the next, but there are tuition calculators online that can offer guidance on future costs. Based on CollegeBoard data collected by Business Insider, putting a child through four years of higher education costs around $42,000 for in-state residents, using the most recent statistics available.

If you’re looking to ensure you have enough life insurance coverage or if you would like to see if life insurance premium financing could help you “mind the gap,” contact Global Financial Distributors today.