How Much Life Insurance Do You Really Need?
Life insurance is an essential safeguard to protect your loved ones from financial hardship after you’re gone. If you have dependents or significant financial responsibilities, it’s crucial to ensure you have enough coverage. But how much is enough? The answer can change over the course of your life, and getting it right is important to ensure your family isn’t left facing a financial crisis.
Here are some signs you might be underinsured in life insurance:
You might be underinsured with extra security inclusion if…
1. Your Only Coverage is Through Your Employer
If your primary life insurance policy is provided by your employer, you may not have enough coverage. While it’s better than having no coverage at all, these employer-sponsored plans typically offer limited protection—often just one to two years’ worth of your salary. This may not be enough to cover your family’s long-term needs, particularly if you have significant debt or children whose education you’re planning to finance.
Additionally, employer-provided life insurance is tied to your job. If you change jobs or lose your job, your coverage ends. For long-term security, it’s a good idea to consider a personal policy that remains with you, regardless of your employment status. A personal policy also gives you more options, such as permanent life insurance, which can offer benefits you can use during your lifetime.
2. Your Income Has Increased
A raise is a wonderful thing, but if your income has gone up since you purchased your life insurance policy, you might be underinsured. As your income grows, so do your financial responsibilities. A higher salary often comes with lifestyle changes—bigger home, nicer car, more frequent travel—and you likely have more people relying on you financially.
If your life insurance coverage hasn’t been adjusted to reflect these changes, your family might struggle to maintain their lifestyle and meet new financial needs if you were to unexpectedly pass away.
3. Your Stay-at-Home Spouse Doesn’t Have Life Insurance
If your spouse is a stay-at-home parent, caregiver, or homemaker, they may not earn a salary, but their contributions to the household are invaluable. If something were to happen to them, you’d likely have to pay for childcare, housekeeping, or other services they provide, which could be a significant cost.
It’s important to consider life insurance for a stay-at-home spouse, not just those who earn a paycheck. The financial impact of losing a partner who manages the home or cares for the children can be immense.
4. You Had a Child
Parenthood brings a new set of financial responsibilities. In 2023, the average cost of raising a child is over $21,000 per year—and that doesn’t even include the cost of college. If you’ve recently had a child or added another member to your family, it’s time to reassess your life insurance needs.
Your coverage should be sufficient to provide for your child’s long-term needs, including food, shelter, and education, until they are financially independent. For single parents, the need for adequate coverage becomes even more pressing to ensure their child is cared for in the event of an untimely death.
5. You Bought a New Home
A mortgage is one of the largest financial obligations most families face, and the pressure to continue paying it off falls on the surviving spouse or family members if something happens to the primary breadwinner. If you bought a new home after initially securing life insurance, you may need more coverage to ensure your family can afford the mortgage in the event of your death.
The last thing you want is for your loved ones to face the emotional burden of losing a spouse or parent, combined with the financial hardship of trying to stay in a home they can’t afford.
Assessing Your Life Insurance Needs
Figuring out how much life insurance you need can be daunting, especially as your financial situation evolves. However, it’s important to ensure you’re adequately covered as your responsibilities change over time. Tools like Life Happens’ Life Insurance Needs Calculator can help you estimate how much coverage is appropriate based on your current financial obligations and future needs.
By taking a little time today to review your coverage, you can provide years of financial security for your loved ones, ensuring they aren’t left struggling in the event of your unexpected death.
