Life Insurance

Are You Underinsured for Life Insurance?

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Life insurance helps provide you with a core component of financial security, but only when you're adequately insured. If you think you may be underinsured, it's worth taking a close look into your circumstances. The appropriate amount of coverage can vary wildly from one person to the next. Plus, the best coverage for you at one point in your life could be inadequate at another. Since life insurance coverage is situational, it's vital to periodically review your policy limits and compare them to your current goals.

Life insurance facts

It can be tricky to estimate underinsured life insurance statistics for the industry on the whole. Although life insurance is standard in the United States, a significant portion of the population still goes without it. According to the Insurance Information Institute (III), 54% of the U.S. population was covered by at least one type of life insurance in 2020. In the same year, life insurance policies within the U.S. paid out $747.4 billion in total. 

While the III has a plethora of life insurance data available, statistics for underinsured life insurance are still hard to come by, as coverage needs vary by circumstance and are ultimately up to the individual. 

When is life insurance necessary?

Life insurance can be more than a helpful tool—it can leave your heirs with a financially stable estate. Although it isn't mandatory, it can be necessary to meet some financial goals, depending on your circumstances. For instance, parents with young children sometimes take out life insurance policies to ensure that their children will have an education fund. 

It's also standard for small business owners to use their policies to protect against their business debt. In both cases, the policy payout helps to keep the policyholder's loss from financially destabilizing their family or business. 

In the end, only you can determine if you have adequate life insurance. Let Ethos help you determine everything you need to know about life insurance to learn how much you need.

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How do I know if I'm underinsured?

Determining whether you're underinsured can be tricky. The first step is to assess your financial goals and compare them to your current and projected financial means. Estimate all your existing assets and income minus any debt owed. Then estimate the cost of your long-term financial goals. 

Consider the cost of education for your children, remaining mortgage payments, what would happen if your family were to lose your income, and any other long-term financial matters of importance. It can be helpful to do this on paper or in a digital document for smoother organization and analysis. 

Then, you can compare the difference between your financial means and your financial goals. Suppose your current life insurance policy coverage limit can cover this difference. In that case, you likely have adequate life insurance. Otherwise, you may consider a higher coverage amount.

Learning how much coverage you need can feel overwhelming, but Ethos has guides and tools for you to help understand and procure life insurance online. Don't be discouraged if you end up with a long list and high numbers. There's still time to plan, and life insurance works best with long-term planning.

What happens if you're underinsured?

The differences between what happens if you have no life insurance, being well-insured, or underinsured can be significant. The exact details will depend on your situation, including how you intend to use your policy. If it's to pay off debt and you're underinsured, then the consequence is that it won't cover all the debt. If the policy serves as income replacement, being underinsured means your family won't have as much money for as long as they would if you had more coverage. 

Life insurance policies

Term policies are one of the more commonly recommended types of life insurance. These policies tend to have lower rates and higher coverage amounts. At least three critical aspects differentiate these policy types from permanent life insurance and make them more affordable. 

The first is that term policies have a preset expiration, wherein they must be renewed (if allowed), or they'll no longer be in force. 

The second aspect is that these policies don't have a cash value or investment component. 

The last is that term policies are more often available to younger applicants. For senior life insurance, whole life policies are more accessible.  

If you're undecided on how much coverage is best for you at this time, consider using Ethos' insurance calculator to calculate your needs.

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