In the wake of the 2008 financial crisis, middle-aged Americans are increasingly overlooking life insurance due to shaky personal finances.
A New York Life survey released Thursday shows Americans born from 1965 through 1976, commonly known as Generation X, reported life insurance needs almost $449,000 greater than what their current coverage provides.
And that's just the typical gap. According to New York Life, 20% of Gen Xers reported zero life insurance coverage. That's up from just 5% with no coverage in a similar 2008 survey.
"When you're hurting for every discretionary dollar, this is one thing people can justify (cutting)," said Chris Blunt, president of the insurance group at New York Life.
A survey of 1,000 Americans ages 37 to 48 reported median coverage of just $260,000 vs. a self-reported need of $708,996 - a difference of $448,996. That gap is up about 24% from a similar study in 2008 that showed a self-reported shortfall of about $363,000.
Blunt noted that it's not just a decline in policies that helped the gap grow so much in just five years. People have fewer resources, in general, to fall back on, which naturally leaves them more exposed should the unexpected happen.
"During the Great Recession, people's homes got creamed, the stock market got hammered," he said. "If your financial assets are down, almost by definition your insurance gap has gone up because that's part of the calculation."
Taking a big risk
Blunt said that while a shortfall is typical between self-reported needs and self-reported coverage, the size of the gap New York Life uncovered was alarming.
"As a rule, most of us weren't as focused on life insurance when we were younger. That's natural, normal psychology," he said. But, he said, it's very risky to fall so short of your family's true life insurance needs.
Ted Bovard, managing director at Fort Pitt Capital Group, a wealth management firm in Pittsburgh with $1.4 billion in assets under management, says it's "universally true" that families underestimate what they need in insurance. And he adds that the median coverage of $260,000 reported in the New York Life survey isn't even close to adequate for most families.
"You have a mortgage for you and your wife; you have your own college loans that still exist because you can't seem to get out of school now without some serious college loans; and on top of that you've got two small kids," Bovard said. "It adds up in a hurry."
But most people don't bother to do the math, Bovard said, because it's uncomfortable to dwell on issues like mortality or bad financial decisions, such as credit card debt or an underwater mortgage.
Beyond the bills, it's also important to look at lost income. Larry Rosenthal, president of Rosenthal Wealth Management Group outside of Washington, D.C., and a financial adviser with two decades of experience, says the right coverage can easily top $1 million for a middle-class family.
This is especially true for Generation Xers, who are in their peak earning years.
"As a rule of thumb, at a minimum you need to have five to 10 times your income in life insurance for most Americans out there," Rosenthal said. So, if you and your spouse collectively make in excess of $100,000 a year as a pair, he notes, a million-dollar policy may not even be enough.
Getting the right policy for you
If your ideal coverage plan is out of reach because times are tight, there are still options. The bottom line is that some kind of life insurance is always better than nothing.
"Do whatever you can do; do whatever you can afford," said Blunt of New York Life.
It pays to start looking sooner rather than later, he adds. Rates are lower the younger and healthier you are, so it can save you big money to lock in a long-term policy in your 30s.
"It's ironic that when the most you need (life insurance), the least psychologically attuned you are to getting it," Blunt said.
One place to start is through a group plan at your workplace, because these plans can be very affordable. The downside is that frequently benefits are small, and policies are only good for as long as you work for that specific employer.
That's why Bovard of Fort Pitt Capital advocates starting with basic term life insurance - that is, a locked-in monthly payment that gives your family a fixed benefit across a fixed time frame should you die. It's easy to understand, Bovard said, and is cheap for Generation Xers in good health.
"Younger people, particularly if they are married and have children, simply need to have insurance," Bovard said. "And about 90% of the time, that should be term insurance."
If you're looking for insurance that will retain some value even if you have the good fortune to live a long and healthy life, Rosenthal said, there are some good alternatives to term life that can be very attractive.
"When you look at whole life or universal life or variable life, the advantage there is forced savings that builds up equity inside it and grows up tax-deferred and you can take out a loan if need be tax free as long as the policy stays in force," Rosenthal said.
While he admitted these can sometimes be a bit more expensive or complicated, Rosenthal said that if you do your homework or talk with an adviser you can easily ensure your policy doesn't get loaded with hidden fees or interest. And the bottom line is that if you don't really understand life insurance or what your family needs, the best policy is to sit down with a financial planner to hash things out.
"For people trying to do this on their own, there's a lot of nuance," Blunt said. "If you simplify it to something someone can do in 12 minutes on a website, something gets lost."