What does underinsured mean? How to know if you have enough life insurance

It can be easy to be underinsured and not realize it. Updating your life insurance isn't often top of mind while you're moving through life. But think back to when you first got life insurance. It may have been a work benefit you didn't think much about, or perhaps you bought a simple term policy. Since then, you may have passed milestones in your life or just had a series of subtle shifts over time that have put you in a different situation now than before.

Getting married, taking a different job, buying a house—these factors can change what you want to be able to provide for the loved ones who depend on you. If it's been a while since you last checked on your life insurance, it may be time to review if your wishes and coverage are aligned if something were to happen to you unexpectedly.

Underinsured coverage means you have life insurance but the amount isn't enough to fully cover the expenses your family is likely to have if you unexpectedly pass away. 

The right amount of life insurance should cover your family’s essential expenses, like healthcare, funeral costs, debts and ongoing bills such as a mortgage and utilities. The goal is to ensure that these financial burdens don't overwhelm your loved ones if you're no longer there.

Consider, for example, if you got 10-year term life insurance with your partner when you bought your first home. At the time, maybe the death benefit was enough to cover the mortgage for 6 months, pay a chunk of your student loans and a bit extra at $20,000. But nearly a decade later, you've had a major promotion, moved across the country to a bigger house and are raising two kids. You're probably underinsured because a $20,000 death benefit likely isn't enough to support your family the way they're now accustomed to for very long.

Underinsurance can place a great deal of burden on the people you leave behind. Without sufficient coverage, your loved ones may be faced with significant out-of-pocket expenses (think funeral arrangements or outstanding medical bills) or loss of income. They also may fall into financial hardship, fail to maintain their current lifestyle and jeopardize their own financial stability.

Certain circumstances usually indicate it's time to reexamine your coverage. To determine if you're underinsured, consider the assets and debts you need to pay off, both current and future expenses, and your income. Life events, both big and small, can impact these factors, so it's important to regularly reassess your coverage needs.

Take a look at these common scenarios where people find they don't have enough life insurance:

It's a great perk to have employer-sponsored coverage, but it shouldn't be your sole means of protection. Because it's tied to your job, you could lose your life insurance protection if you're laid off, change jobs, become disabled or step back to care for family. Even if your contract is portable or convertible, it will likely be more expensive if your employer isn't chipping in for the premiums. Another consideration is that many employer-sponsored contracts are capped at a specific death benefit amount, which may not be enough to cover your family's needs.

When you die, your outstanding debts or financial obligations can be claimed against your estate. Creditors, such as banks, lenders or service providers, and medical bills may make a claim on your assets. If your survivors depend on those assets—whether it's your home, savings or other valuable property—the loss of these resources can have a devastating impact.

If you've changed jobs or been promoted, you may have more money coming in — which means you may also have loosened your budget and have more expenses too. Perhaps you and your spouse scraped by for a while in your parents' spare bedroom while you earned your degree. A small life insurance contract might have been fine at that time. But once you landed a stable income, you took on a condo payment plus utilities, homeowner fees and property taxes on top of your college debt. You've built up a life, and it could be a hardship for your spouse to maintain if they don't have your income anymore.

Changes in family structures can mean you need more life insurance to take care of more dependents. Having or adopting children is just one instance to consider. You may have elderly parents who move in with you so that you can be their caregiver, or there may be other family members or loved ones you're dedicated to supporting financially. When you review your coverage to evaluate if you're underinsured, consider how much your family has expanded.

Consider also insuring your children with juvenile life insurance when they are young. This can provide coverage for them when premiums are less expensive and your child is insurable.

Another often unpredicted scenario is when a loved one develops a condition that requires major financial support. Your spouse, child, parent or someone else who depends on you may not be able to live independently or require ongoing care. While you're planning for special needs, realize you may need to increase your life insurance to provide as much as you can for them now and into the future.

Starting a business might mean you've borrowed seed money or are financially tied to your colleagues pending the startup's success. If you passed away, your business partners might struggle while finding your replacement or your loved ones might want to buy out your ownership share. It may have been something you didn't anticipate when you got your last insurance contract, but being underinsured now affects several people. A buy-sell agreement funded by the right amount of life insurance could protect the people you care about.

You can support a charity's mission while alive by donating your time and money, and you can continue giving after death, allowing others to benefit from your generosity long after you've passed. Whether you prefer to give during life or after death, or both, you can amplify your charitable desires through life insurance.

Free life insurance calculator

Wondering how much life insurance you really need? Our calculator can help you get a sense of the right amount coverage to protect your loved ones. It's also a quick way to see if you're underinsured.


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Life insurance needs vary for each person, which is why there are different options for coverage length, coverage amount, and whether your policy includes just insurance or additional features like cash value. Choosing the right fit depends on your individual situation and goals.

As you determine whether or not you're underinsured, ask yourself these key questions:

• Are you the main income earner? If your spouse wouldn't be able to make up for your income after you're gone, it's smart to insure what you provide financially, at least until they can adjust to their new income situation.
• Are you the main caretaker? Family caretaking may be unpaid, but it always has a cost. How much would your survivors have to pay others if you weren't around? Think about housing, meals, transportation, basic nursing, supervision and activities of daily living.
• What does your family spend to live comfortably for a year? Take a close look at your expenses and total up what your family spends in a year. While the task may be tedious, knowing this number can provide peace of mind when you're choosing a death benefit.
• What obligations lie ahead? It's typically easier and less expensive to buy life insurance when you're younger. Even if you don't have a mortgage, kids or college bills today, it might make sense to increase your coverage now so you aren't underinsured later.
• How far off is retirement? Some people only need life insurance during their working years. When they reach their 60s, they have plenty of assets and fewer dependents. Age aside, if financial independence is a long way off, you may need to up your coverage.

When you're ready to adjust your coverage, it's not just a matter of increasing the death benefit. You have several options:

• Laddered term. Owning multiple life insurance contracts allows you to secure different coverage amounts to align with changing protection needs throughout your life.
• Increased death benefit. If you have an increasing term contract, you can up your death benefit by a certain dollar amount or percentage at predetermined times without medical underwriting.
• Term-to-permanent conversion. If your existing contract has an end date, a "term-to-perm" conversion could allow you to make that coverage permanent without medical underwriting.
• Permanent contract. If you need coverage that can last a lifetime, as long as premiums are paid, consider permanent life insurance. These contracts may also accumulate cash value and earn dividends if funded properly.
• Paid-up additions. If your whole-life contract pays dividends, you can use them to increase your permanent coverage.
• Company-owned life insurance. If you're a small business owner, your company could buy key person insurance to help cover business debts, keep the business going or wind it down if a key employee dies.