Carol tells me she never thought about money after she got married. She quit her job so she could be with her husband who had to travel a lot for work.
A season of change
Things are different now, of course. After nearly 30 years out of the workforce, Carol recently returned to work. Although finding a job at her age wasn’t easy, she wanted to make sure that she would have enough money to last as long as she needed it.
She hastens to assure me that her husband wasn't negligent in providing for her – quite the contrary. He left a sizable retirement account she's tapped into, and the life insurance he had through his employer paid about $400,000 after his death. There was another $200,000 in equity in their home, but that supplied the down payment on her condo, for which she pays about $2,000 a month in mortgage and condo fees, monthly expenses that sometimes keep her awake at night.
His $500,000 term life policy expired just two years before he died. He didn’t feel it was necessary to have since his children from a previous marriage had all finished college and were already married.
Carol never thought to ask her husband what would happen to her if he died and how much money they had tucked away. They were always so confident about their future plans.
A shift in financial priorities
Carol’s situation is far from unique. According to a 2017 report by the Life Insurance Marketing and Research Association (LIMRA), only 59% of Americans carry any life insurance coverage at all, and of those covered, nearly a third have only limited group coverage through an employer or other organization. About 40% wish their spouses would purchase more life insurance. Sadly, over 10% are like Carol and have no idea how much, if any, life insurance coverage their spouses carry.
Over the past decade, life insurance has become less of a financial priority for most Americans. Concerns about retirement income, disability income, medical expenses, personal debt, and basic current living expenses all ranked above the need for life insurance in the 2017 LIMRA study, a consequence of the Great Recession and an uncertain economy.
The life insurance gap
What's driving the gap in life insurance coverage today? For most, it's the perceived cost; about 66% of study participants said that life insurance was too expensive. Interestingly, however, 93% overestimated the cost of the coverage they felt they needed, sometimes by as much as 400%.
Another concern was qualifying for coverage: A shocking 40% of those 35 and under believed they would not be able to qualify for the coverage they wanted.
Perhaps the most significant concern, however, is that fewer than a third had a realistic idea of the amount of coverage they needed to provide for their spouses and children in the event of premature death.
About 40% of women wish their spouses would purchase more life insurance...over 10% are like Carol and have no idea how much, if any, life insurance coverage their spouses carry.
Kevin Brayton, an executive vice president in Prudential's Individual Life Insurance division, has a rule of thumb for income replacement purposes. "We like to use six to 10 times annual earnings as a baseline coverage amount," he says. "It's a reliable figure to fill in the gap between other income sources such as retirement savings, pension distributions, and social security in a way that won't significantly change the beneficiary's lifestyle."
Other considerations also factor into the final coverage amount. "The age of the insured, life expectancy, retirement expenses can all affect the recommended coverage," Brayton says.
He stresses the importance of regularly updating insurance needs to reflect any changes in short- and long-term financial circumstances. "It really is necessary to review the overall financial situation every few years to ensure that all financial matters are cared for after an unexpected or premature death."
Looking into the future
Ultimately, Carol’s husband was underinsured by about $450,000, a sum that would be a game-changer for Carol today. She can expect to live at least another 23 years, according to current life expectancy tables – and her assets and cash reserves are simply not adequate to maintain the lifestyle she shared with her husband.
This caused Carol to panic in the beginning. She still had a huge mortgage on her home – a home she had always envisioned as the place her future grandchildren would visit on summers and holidays. It broke her heart to learn that she just couldn’t afford to keep it anymore.
Still, Carol considers herself incredibly lucky. She had two years without real financial worries, using what her husband had left her. She was able to pay the bills and move into a smaller home. She even welcomes having to work a few more years – not only will it allow her to stretch her savings, it will also give her the chance to meet new people.
Carol is making it on her own, but she cannot imagine how difficult life would be if her husband had left her sooner – a few years earlier when their kids were still in school. If there’s anything she's learned through this journey, it is the importance of having the “talk” with your loved ones. You don’t want them to be surprised and unprepared when the time comes.
What you can do next
Regularly update your life insurance needs to reflect any changes in short-and long-term financial circumstances. This is to help ensure that all financial matters are cared for after an unexpected or premature death.