Got life insurance? You may not have enough

Liz Weston, NerdWallet

You probably need life insurance if your death would cause financial hardship to someone else. If the only coverage you have is through your job, though, you may not have enough.

Fortunately, buying life insurance has gotten easier in some ways during the pandemic. Plus, coverage may be cheaper than you think.

The rising COVID-19 death toll has led more people to at least think about their life insurance needs, and many have taken action. One in 4 Americans who have life insurance say they purchased or increased their coverage because of COVID-19, according to a NerdWallet survey conducted Oct. 29 to Nov. 2 by The Harris Poll. Many of those who purchased or increased their coverage were motivated by fear of being diagnosed with the disease (30%) or knowing someone who had (29%).

A survey by insurance industry trade group LIMRA this summer found nearly 6 in 10 Americans (58%) say they have a heightened awareness about the importance of life insurance, and about 3 out of 10 (32%) who were shopping for life insurance said it was in response to COVID-19. The number of term policies, the most popular type of life insurance, rose 10% in the third quarter compared with a year earlier, LIMRA found. That was the largest increase in 18 years.

“Obviously, the pandemic is making people much more sensitive to their mortality,” says Alison Salka, LIMRA research director. “So we see more people aware of the need for life insurance.”

Still, LIMRA has estimated that 30 million American households don’t have coverage, and another 30 million don’t have enough. The average coverage gap between what people have and what they need is about $200,000, LIMRA says.

“There is a perception about, ‘Well, I have it at work, and that’s got to be enough,’” says Marc Cadin, CEO of Finseca, another insurance industry group. “Most people have not done the work to really understand what would happen if they were to prematurely die.”

Employer-provided life insurance policies are typically capped at certain dollar amounts, such as $20,000 or $50,000, or limit coverage to one to two times an employee’s annual pay. That may seem like a lot, but parents with young children may need 10 times their salary or more to replace their incomes until the kids are grown. (Other types of insurance you may get from your employer, such as accidental death or critical illness policies, generally are too narrowly focused to protect you adequately.)

Even if your need is more modest — your partner requires your income to pay the mortgage, for example — an employer-provided policy might fall short. Plus, you typically lose your coverage if you lose your job, as many Americans have during the pandemic.

Having your own policy means your beneficiaries will remain protected. And thanks in part to the pandemic, you may be able to get coverage faster and without a medical exam.

Increasingly, insurers are automating and accelerating the application process, LIMRA’s Salka says. Instead of sending someone to your home to check vital signs and collect blood and urine specimens, some insurers are waiving exams or are exclusively using exam and lab data provided by the applicant’s physician. This trend was already underway, but social distancing and other pandemic challenges mean more insurers are adopting these practices, Salka says.

Life insurance is often cheaper than people expect, Cadin says. A 30-year-old woman in excellent health might pay $193 a year for 20-year term policy for $500,000. A 40-year-old man, also in excellent health, might pay $341 for the same coverage.

Term insurance covers people for a specified period of time, which is typically 10, 20 or 30 years. Term policies are significantly less expensive than permanent life insurance, which has additional features such as a cash value that can be borrowed against and that grows over time.

But the higher costs of permanent policies can tempt some buyers to skimp on coverage. If you do need life insurance — and you probably do if someone would be financially impacted by your death — then your priority should be getting enough.

How much is that? A life insurance calculator can help you refine your estimate. You may want to replace your salary for 20 or 30 years if your children are young, for example, and perhaps provide a college fund. You may want to add in your mortgage balance and any other debts. If you’re a stay-at-home parent or other unpaid caregiver, consider how much it would cost to hire someone to provide those services and for how many years. For example, your kids may need a full-time babysitter until they’re old enough for school and then a part-time one until they’re in their teens.

Once you have a total, subtract your “liquid” assets, such as savings accounts, college funds and any life insurance you already have. That’s the amount of life insurance you should start shopping for, without delay.