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If the primary breadwinner in your family were to pass away, how many years of lost income would your life insurance policy replace? According to a recent Life Insurance Gap survey by New York Life, most families want their policies to cover that lost income for 14 years. Unfortunately, the policies they have in place tend to cover a lot less—and the shortfall puts them at great financial risk.

The gap survey examined the difference between how much life insurance coverage families had in place and how much they wanted that insurance to cover should death strike. The median difference was $320,000, a significant increase from $289,000 five years prior. The median amount of life insurance coverage the surveyed families had was $220,000. The median amount they needed was $540,000.

Results of the survey indicated that the life insurance coverage gap varied by geographic region. Families in the Western U.S. had the biggest gap ($457,000 on average). Families in the Northeast ($334,000 average gap), the South ($302,000 average gap) and the Midwest ($229,000 average gap) followed.

Why does this matter? Life insurance protects your financial dependents—including your spouse, children or parents—in the event of your death. While coverage of funeral expenses is welcome, the loss of your income will cause your family’s greatest financial hardships. Think about your monthly bills. Can your family handle those without your annual salary?

In the past, the industry rule of thumb has been to purchase a life insurance policy that is seven to 10 times the amount of your salary. However, given the 14 months of income replacement survey participants indicated they wanted, 15 to 20 times your salary might be a wiser goal—especially if your heirs are in the midst of saving for college or retirement or paying down a mortgage or other significant debts.

Whether you make $25,000 a year or $250,000, 20 times your income probably sounds like a lot of money. Fortunately, life insurance policies can be relatively inexpensive. Term life coverage tends to be the cheapest because it has no investment component (unlike whole or universal life). The coverage you purchase is good for a set period during with you pay a monthly premium. The size of the policy and your age will influence the cost.

A whole life policy combines life insurance with an investment fund. Part of your monthly premium goes towards building the cash value of the investments. Upon your death, your family will receive the fixed lump sum the policy was worth at purchase as well as the additional cash value. Universal life combines life insurance with a money market-type of investment that pays a market rate of return. Variable life combines life insurance with a stock or bond mutual fund investment.

Do you have a gap in life insurance coverage? Consult your financial planner to find out. Now is the best time to discuss the role life insurance can play in your family’s future.


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