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A Common Financial Mistake: Inadequate Life Insurance Coverage

A Common Financial Mistake: Inadequate Life Insurance Coverage
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Life insurance is a very important decision for every family

. While the importance of life insurance is understood well in the United States, most Americans think that just having a policy is enough to protect one's family.

In 2007, the country's first-ever Life Insurance Gap' study revealed that many Americans have just half the life insurance protection they needed to meet their financial objectives. Since this survey was published the economy has spiraled downwards, and this statistic may well have changed for the worse.

What is the ideal amount of coverage?

The answer to this question can never be cast in stone, because financial needs are different for each family and change with the seasons of life. However, most financial advisors recommend buying coverage equal to around 15 times one's current annual income.

Another way to find out is for each family to work this amount out on their own. You need to honestly write down all that you expect your life insurance policy to take care of mortgage, college fees for the kids, daily living expenses, etc. Write down seemingly minor expenses as well, such as plumbing and accounting because it all adds up. How will your family live after you are gone? Will your partner take up a job? Will they have to move to a more affordable neighborhood? Work everything out. Unless you visualize it and take the cost of living into consideration, you will never be able to arrive at the right amount.

There's a third easy' way to work out the amount of coverage. Use an online life insurance needs calculator found on reputed websites that offer life insurance tips and resources. These take inflation and the value of your current assets into consideration so they can be quite accurate, provided you have honestly filled in the information in their form.

Why just a work life policy won't do

A majority of Americans who have workplace life insurance assume it is a strong safety net when they are actually underinsured. However, never depend solely on work life insurance because:

Most such policies only insure you for a maximum of 3- 4 times your salary. This is simply not enough insurance especially if you have a young family, many dependants, financial obligations such as loans and mortgage, etc.

Secondly, work life insurance policies lapse when you leave the workplace for whatever reason including retirement. This means that you will suddenly find yourself without coverage, and that's a dangerous situation to be in.

With the problems presented by an uncertain economy, it makes sense to buy private life insurance. Also, life insurance costs increase with age. So it makes sense to buy privately owned life insurance at the earliest.

The importance of reviewing policies

Even if you have carefully worked out your life insurance needs and have bought a policy, you should not just forget about the purchase. Remember that policy is meant for your family, and will help them live a decent life even after you are gone. This necessitates that you review your policy whenever there is a life-changing situation like a birth, death, new job, promotion, an empty nest, and sudden unforeseen expenses, etc.

During a review you will go over all your investments, your existing life insurance coverage amount, and your assets and work out how much your family will have in the event of your death. Use one of the methods listed above to work out how much life insurance your family will need given the new development. For instance if there is a new family member, you will have one more dependant and your need for life insurance will increase as well.

Bridge the gap between perception and reality

The Life insurance gap study revealed that a majority of Americans believe they have enough life insurance to take care of their families. However, when they listed out their needs and financial obligations, they found out that they had just enough life insurance to take care of their families' needs for 4 years, on average. This disconnection between perception and reality clearly reveals that inadequate life insurance is one of the most common mistakes that Americans are making today.

Have you reviewed your policy lately? Is the amount you have insured enough to take care of your family, and will it be enough to allow them to pay off your credits and loans, and still live decently? If you find that your life insurance is not enough there's no reason to worry. Simply take out a fresh term life policy to make up the difference.

A new life insurance policy may mean a strain on your monthly budget, but nevertheless make it your priority. Your family may not understand now, but there will be a time when they will thank you for it.

A Common Financial Mistake: Inadequate Life Insurance Coverage

By: Denise

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A Common Financial Mistake: Inadequate Life Insurance Coverage