Life Changes

Do you have the life insurance you need?

Got life insurance? Maybe so, but chances are increasing that you don't have enough.

That's the conclusion of a new survey commissioned by New York Life, which found that Americans want enough life insurance to cover 14 years of lost income from a breadwinner—but on average, have coverage for only three of those years.

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The gap between Americans' average life insurance coverage and the amount they say they need widened from $289,378 in 2008 to $320,000 in 2013, the survey found. Even though survey respondents appear to have cut back over those five years, and said in 2013 that they need less coverage, their median insurance holdings dropped further, from $300,000 to $220,000. Life insurance policies now cover an average of 59 percent of what Americans say they need.

"We were fairly surprised by how much the gap had increased during that period of time," said Chris Blunt, copresident of New York Life's insurance group.

Not only do Americans have less insurance than they say they need, plenty of Americans have no life insurance at all.

Building a strong financial foundation: Life insurance
Building a strong financial foundation: Life insurance

A 2013 study by LIMRA, formerly known as the Life Insurance and Market Research Association, found that while 85 percent of consumers say people need life insurance and 65 percent say they personally need it, just 62 percent actually have policies. And a quarter of those who have a policy think it is too small.

The picture is grimmer when you consider individual life insurance, or insurance purchased by individuals as opposed to the (typically small) group insurance policies provided by employers or associations. LIMRA found in a 2010 survey that only 44 percent of respondents had individual life insurance policies, down from 50 percent in 2004.

New York Life cites the recession as the reason for Americans' skimpy life insurance coverage.

Americans cut back spending in any number of categories after the financial crisis hit, and life insurance was probably as vulnerable as anything else that was not immediately essential.

How well do you know your insurance policy?

Blunt says a second macro factor is at play as well: The number of insurance agents entering the field has been declining, and those who do work for the big life insurers are aging.

Fewer agents out pitching life insurance policies "gave people a further excuse to put off a discussion that they'd like to put off anyway," he said.

Insurance the ignored component in financial planning

No two families have the same needs for life insurance, but there are rules of thumb to follow to determine what is right for you.

New York Life has published a new calculator to help you determine how much life insurance you need. So does Life Happens, a nonprofit funded by insurance producer organizations. If you want help from someone outside the industry, the American Institute of Certified Public Accountants also offers a calculator.

How to Invest for a (Mostly) Tax-Free Retirement

In the unlikely event that you purchase more life insurance than you wind up needing, you can convert a universal life policy to a Life Insurance Retirement Plan, taking out the excess cash without a tax penalty. (Remember, though, that fees on these plans tend to be high.)

Blunt points out that with interest rates low, a policy that may have seemed adequate five or 10 years ago will no longer throw off the same income for beneficiaries. And he says life insurance rates right now are low: a 35–year–old male can purchase a 20–year term life insurance policy with a $250,000 benefit for $220 a year.

That may seem like a lot when you are laboring under student loans and the job market is slow. But you don't want your family to find out the hard way that life insurance is a perilous thing to cut back.