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October 10, 2020

Reassessing Your Life Insurance Coverage Following the Death of a Friend or Family Member

reassessing life insurance after loss

Life insurance exists to help protect loved ones who depend on you financially and who may face financial uncertainty or hardship upon your death. Life insurance is considered an essential component of a long-term financial plan but despite its crucial role, many people remain uninsured or underinsured. The “need-gap” for insurance grew to 16 percent in 2020, meaning 41 million consumers say they need life insurance coverage but do not have it.1

The statistics clearly show consumers recognize the need for life insurance, so where’s the disconnect between knowing you need it and making that purchase? It’s not uncommon for young people to acknowledge they need it … just not now. After all, who wants to think about death when you’re young and single?

All grown up

It’s more than likely you’ll start thinking about needing life insurance as you face “adulting” head-on. For many, that means marriage and starting a new life together. Getting life insurance at this stage is a good choice. According to the U.S. Bureau of Labor Statistics, among married couples, both spouses are employed in close to half (49.4 percent) of those families. Having two incomes to maintain your lifestyle could mean that if something happened to one of you, the other may face financial hardship.

Buying a home is another life event people cite as a reason to buy life insurance. For most families, their greatest asset and largest debt is their home. Home prices vary according to where you live but the average American household mortgage is $189,586.2 Could your spouse afford the mortgage without your income?

If these other life events haven’t proved the need for life insurance, one that most likely will is the birth of your first child. Most parents would do anything necessary to make sure their children are provided for in every way. The cost of raising a child in America from birth to age 18 is an average of $250,000, not factoring in the cost of post-secondary education.2 Having life insurance means you can plan to help address today’s needs and those farther down the road, including quality education.

When you least expect it

Sometimes the need for life insurance presents itself unexpectedly following the death of a family member or friend. It is not uncommon for the unexpected death of someone close to us to cause us to reflect on our own mortality.

If you have loved ones who depend on you for their financial wellbeing, if you have any debt, or if you want to ensure your final expenses won't burden your loved ones, you may need life insurance. If there are people in your life who will be adversely affected financially when you are no longer here, you may need life insurance.

Two scenarios

If the deceased had adequate life insurance in place, it’s likely some provisions were made to help pay for final expenses. In 2020, the average North American traditional funeral costs between $7,000 and $10,000 including the services at the funeral home, burial in a cemetery, and the installation of a headstone.3 Depending on the amount of the life insurance payout, there may be enough money to help pay for debt or unexpected expenses the family may confront as a result of the death of their loved one. In the short term, the money a family receives as a death benefit may help lessen their financial worry.

As time passes for the family, a comprehensive life insurance portfolio can help with income replacement, mortgage protection, and funds to help provide for the children’s education. Having a well-planned life insurance plan may not solve all of a family’s financial needs, but it can certainly make life easier than being without it.

Unfortunately, another scenario is also possible when a family loses an income earner. If there was no life insurance at all, or inadequate life insurance coverage, the family could immediately find itself facing financial insecurity. Seventy-eight percent of U.S. workers say they are living paycheck to paycheck, even those making more than $100,000 per year.4 More than one in four workers do not set aside any savings each month, and nearly three in four workers say they are in debt.4 Being hit immediately with their loved one’s final expenses could easily be the start of long-term financial troubles. As time passes, the family may continue to struggle to pay ongoing household expenses, including the mortgage, without the deceased’s income.

Each of the above scenarios can serve as a lesson: what to do or what not to do.

Reality check

Things happen when we least expect it. Even if you already have some life insurance, circumstances can change and so can insurance needs. You should consider reassessing your life insurance needs with a licensed insurance agent annually and after each major life event. In addition to those previously mentioned, some other life events may merit reassessing your life insurance coverage:

Your birthday —

Some insurance policies have an end date for the term of the policy based on your age. Discuss your options for renewing the term or converting to a different type of policy.

Divorce —

This usually calls for changing your beneficiary, and possibly raising the amount of coverage on yourself.

Change in your career —

If you receive a promotion, it’s a good time to consider raising your life insurance coverage. If you are changing jobs, remember that you may lose any life insurance coverage provided through your previous employer.

Kids —

Whether you are welcoming additional children or grandchildren by birth or adoption, reassess your life insurance needs. If your children leave the nest, discuss with your licensed insurance agent if it’s wise to alter that coverage.

Although distressing, the sudden death of a family member or friend can serve as a reality check that we’re all mortal and open our eyes to the financial protection life insurance can offer or the need to reassess our life insurance needs.

  1. LIMRA, 2020 Insurance Barometer Study (November 13, 2020)
  2. SHIFT, American Debt Statistics (October 7, 2020)
  3. Parting, Funeral Costs: How Much Does an Average Funeral Cost? (October 7, 2020)
  4. Forbes, 78% Of Workers Live Paycheck to Paycheck (July 7, 2020)

Categories: insurance, life insurance, term life insurance, whole life insurance

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