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Life Insurance Coverage Gap

Let’s take some time to think about something that we think everyone needs to own.

It’s a plan where there is a promise to pay someone you care about a predetermined amount of money after a specific event occurs in the future. This event is your death, and in order to have the money paid out you need to pay a life insurance company a monthly premium. 

This sounds crazy… Right? 

You pay a life insurance company a premium and then you really hope that you do not have your beneficiaries collect the payout any time soon. That’s a heck of a value proposition for people that sell life insurance.

Add into this the fact that life insurance makes people face their own mortality and often they will choose to avoid the idea altogether. I have insurance at work, why would I need to face the process of buying life insurance coverage individually?

The answer often comes down to identifying something called the coverage gap. Say you make $50,000 per year at work and your group benefits provide you 2 times your annual income for life insurance. This means that if you die, your beneficiary would receive $100,000 from your employer benefit plan. That isn’t a small amount of money by any means, but is it enough?

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Consider a few examples…

  • If you own a home and you have a mortgage of $400,000 on it, there is a gap in your coverage.
  • If you have a family and your annual income has now disappeared, there is a gap in your coverage.
  • If you own a business and your role in the company now needs to be filled, there is a gap in your coverage.

The reality is that often people are faced with more than one of these situations. This leads to a larger than expected coverage gap when they calculate how much life insurance coverage you actually need.

Human nature leads us down the wrong path here. We do not like to think about what happens when we die and we know that there is already life insurance coverage in place through our employer. So, are we happy with the status quo?

This is a potentially disastrous outcome though. Using the mortgage example above, will your spouse/partner be able to continue to pay the mortgage every month without your income? In most cases that answer will be no. Now it’s time to identify and fill the gaps.

To fill in the gaps in your plan, identify first if your need for life insurance is temporary or permanent. For example, a mortgage is a temporary need and a funeral is a permanent need. If your temporary needs create a coverage gap of $500,000, then consider term life insurance to fill that gap.

The reality is that you are better off to fill in the gaps and have too much money left to your beneficiaries than the opposite. Too little has the potential to be disastrous.

Identify and fill the coverage gaps in your life insurance plan. The time you take to do this could be invaluable to your beneficiaries in the future. On top of that, term life insurance is much more affordable than most people realize.

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