Your Life Insurance Policy Probably Isn’t Enough

Life insurance is the one failsafe that many Americans will put in place even when they don’t have a last will and testament or some other means of long-term support for themselves and their loved ones. However, a recent survey from Nationwide reveals they may be doing it all wrong.

When you look at the main purpose many individuals buy life insurance — to sustain the same standard of living for their families should they die prematurely — a troubling 98 percent are coming up short. That’s because the goal of the survey participants was to do more than just pay off debt and provide a cushion. They wanted to replace their entire income.

“The average consumer surveyed will earn approximately $1.5 million before they retire and currently holds about $300,000 in life insurance coverage, leaving them about $1.2 million short of replacing their income with life insurance,” the company stated.

Eric Henderson, senior vice president of life insurance and annuities for Nationwide Financial, added that too many Americans “make the mistake of assuming that simply providing what may appear to be a large lump sum of money for their beneficiaries will be enough to protect them.”

“Instead, they should think about how much of their income the insurance money will replace,” he says. “If it doesn’t replace a high percentage of it, their family faces the risk of financial disruption or a reduced standard of living. It’s simple math, and it doesn’t add up for 49 out of 50 of those we surveyed.”


A Tall Order

Especially puzzling is the fact that many consumers were willing to pay enough to close or reduce this income replacement gap; however, the average life insurance policy currently replaces just 16 percent of the income the insured person will earn before retirement.

“Filling a $1.2 million income replacement gap without life insurance is a tall order for surviving family members when you consider late life expenses such as college, weddings, retirement, health care and long-term care,” Henderson said. “The good news is that an affordable solution may be available for consumers of nearly any income level.”


Just What Is The Solution?

Those who responded to the survey said they were willing to pay an average of $99 per month to ensure their family can maintain its current standard of living. For about that amount, “a healthy 35-year-old man can purchase a 20-year term life policy worth more than $2.3 million,” while a healthy 35-year-old woman could buy “more than $2.6 million in coverage,” the report stated — more than enough to take care of the existing coverage gap.

“It’s common for Americans to insure the entire value of their largest assets,” Henderson said. “For most of us, the income we will earn before retirement is far more significant to the financial well-being of our family than any material possession. The cost for enough life insurance to replace this income may be less than you spend to insure your home or car. A lack of understanding of the true cost of life insurance may be part of the reason for such widespread consumer inaction.”


In Summary

Whole life insurance for the amount that it would take to replace your lifetime income may not always be affordable, especially if you’re applying for it later in life. However, that’s no reason to avoid a term life policy. Of course, if you want the cash value, it won’t fill that need, but it will cover you for those prime working years and protect your family at an affordable rate should the worst happen. That’s why most families suffering from coverage gaps tend to mix and match the two financial products. What you don’t want is to pay for coverage that isn’t adequately meeting your needs.

Share this Article
Farmers - The Hartford - State Farm - Kemper Direct - Nationwide - Allstate - New York Life