Having life insurance is an important milestone in an adult’s life, and one that’s even more relevant when said person starts a family, gets a mortgage, or begins to incur significant financial obligations. That being said, simply getting life insurance is not enough to properly ensure the well-being of your loved ones after your death, you also need to make sure that you have enough coverage for them to be able to keep going without your financial support. Unfortunately, a whopping 90 % of Canadians are underinsured and the majority of them don’t even realize the severity of the issue. Let’s explore this matter.
What Does Being Underinsured Mean?
Life insurance death benefits aim to provide your loved ones with some sort of financial safety net upon your death. Being underinsured means that your coverage doesn’t fit your needs, whether it’s because the amount of the payout is insufficient or because the policy expires before you die and/or can put the death benefit to good use. How to avoid putting yourself in this position?
Buy an Adequate Death Benefit
It’s not always easy to know how much money is enough to make a decent death benefit. If you have a fairly basic financial (and family) life, going for a payout that’s roughly equal to 10 to 15 times the policyholder’s income should be good enough. If your financial situation is not exactly average and/or you have an unusually high number of dependents, you should ask for a higher death benefit, and ideally, talk to a financial advisor before making a decision in this regard.
Go for a Policy that Spans your Lifetime
This is an issue for term life policies only, for obvious reasons (unlike whole life policies). Since longer policies are obviously more expensive than shorter ones, an individual can be tempted to sign up for a term that’s way too short in order to save on the premiums. That’s a dangerous strategy, especially if you forget to renew your policy before it expires. If your policy expires before your death or your subscription to a new policy, you’ll be left with no coverage and if something happens to you during this coverage gap, your family will be left with nothing, no matter how much money you paid your insurance company during the previous term. That’s the reason why you should go for a whole life insurance policy (if you can afford the premiums…) or for a longer-term life insurance policy in order to decrease the probability that you’ll “outlive” your coverage.
Complement your Group Life Insurance Coverage
Some people think that they don’t have to think too much about the specificity of their life insurance since it’s provided by their employer, and their company would never pay for a policy that’s suboptimal, right? That’s wrong on so many levels. Although they’re nice to have, group life insurance policies paid for by an employer typically don’t provide enough coverage for a person with dependents. Most of these group policies have a cap of 250 000 $ on their benefit (per person), which won’t last more than a couple years to your loved ones if they’re really depending on your income. Plus, it’s not transferable, so if you lose your job or voluntarily leave it, you’ll automatically lose your coverage. That’s the reason why employer-sponsored life insurance is rarely more than a good supplement to your already-existing, individual life insurance policy.
What Happens if you Don’t Have Enough Life Insurance Coverage?
Not having enough life insurance coverage is not merely an inconvenience, it can have devastating consequences for your beneficiaries. Here are the most common ones.
Inability to Keep Up with Everyday Expenses
Having a policy that pays a few hundred of thousands dollars seems good on paper, but with the loss of one of the main income in a household, it’s easy to burn through that kind of money in a couple of years, well before your beneficiaries have become independent financially. After having paid for funeral expenses (which are 5-figure endeavors, these days) and relied on the death benefit for a couple months without downsizing, your surviving spouse may be struggling to keep up with everyday expenses to the point of considering major life changes.
The Disruption of Long Term Financial Plans
Speaking of major life changes, a surviving spouse could be forced to downsize their house because of their inability to keep up with the expenses associated with their current properties. If you intended to put your kids through college but didn’t actually prepare for it financially and/or didn’t plan for an adequate death benefit, this project can be postponed, cancelled entirely, or your children can be forced to go into debt.
Even worse, some of your assets could be seized! Unless you took specific measures to avoid that, the weight of your financial liabilities befalls on your beneficiaries upon your death. If they can’t afford to pay these charges, the assets they co-owned with you could become the property of your creditors.
As you can see, not having enough life insurance coverage is a serious issue that can lead to even more serious consequences. You probably don’t want to put your loved ones in some of the scenarios described above, so you should be careful when choosing a life insurance policy.
If you have some questions or doubts about what’s the best option for you, talk to a financial advisor and/or visit https://emma.ca.
