Stats Reveal: This Many Americans Are Underinsured

Life insurance can be tricky: You want to get enough to cover your various expenses so your family can thrive, but you don't want to get too much and overpay for coverage unnecessarily. As it turns out, the former is more of an issue than you might expect.

Here's what to know about the millions of Americans who don't have adequate coverage, and how to figure out how much insurance to buy.

106 million Americans are underinsured

A whopping 41% of Americans (or 106 million, roughly) admit that they don't have adequate life insurance coverage, according to the 2022 Insurance Barometer Study conducted by the Life Insurance Marketing and Research Association (LIMRA) and Life Matters. (That can include people who need life insurance but don't currently have a policy.)

Unsurprisingly, Gen Zers (49%) and millennials (47%), as well as women (44%), are more likely to report being underinsured.

That can be a huge missed opportunity since policies can come with additional benefits, like long-term care and disability riders. But it's also setting up some families for serious financial difficulties. In fact, the same study showed that 37% of families say they would face financial hardship if the primary wage earner died within six months.

How to get adequate life insurance coverage

There are several methods you can use to calculate your life insurance needs.

HLV theory

The Human Life Value (HLV) theory says that your coverage needs equal a specific multiple of your annual income based on your age:

• Adults up to age 40: 30 times their annual income
• Ages 41 to 50: 20 times their annual income
• Ages 51 to 60: 15 times their annual income
• Ages 60 to 65: 10 times their annual income
• Individuals over 65: 1 times net worth

So if you're 40 years old and earn $120,000 per year, you'd need a $3.6 million policy. This is the formula that insurers use to calculate maximum coverages. However, it doesn't specifically look at your individual needs, so it's not the most accurate option. You may even end up over-insured, resulting in unnecessarily high premiums.

DIME method

The DIME method requires you to do slightly more legwork than the HLV theory. The acronym stands for debt (excluding mortgage), income, mortgage, and education. So, let's say you have $10,000 in non-mortgage debts, you earn $150,000 per year, have $350,000 left on your mortgage, and one kid that you want to send to college (the annual average ranges from $26,000 to almost $56,000, depending on the type of school and as of the 2021-22 school year.) You'd need a policy value of about $524,000 to cover the debts, mortgage, and a four-year degree, plus your annual income multiplied by the number of years you'd expect your family to need that cushion.

Again, because of the relative simplicity of the method, it can result in a figure that doesn't accurately reflect your needs. So it's usually best to take a serious look at your finances and take the time to calculate all of these figures based on your age. (Life insurance calculators can help here.)

The best method to calculate your life insurance needs

Regardless of the method you choose, you should try to account for the costs of replacing your salary as well as additional costs, like funeral and burial costs, college tuition, and paying off your mortgage and other debts. But there are also more hidden factors, like replacing employer benefits such as health insurance and retirement contributions (including any match you get) that you need to consider. Plus, you need to account for inflation, which has averaged 2.5% per year based on Bureau of Labor Statistics data from 2012 to 2022. Then you need to deduct any assets that may provide income for your family, like Social Security benefits or existing retirement savings.

With all of those considerations, it's no wonder that so many Americans are underinsured. If you find that your current insurance policy doesn't cover your full insurance needs, you can buy an additional life policy while keeping your existing one in place, provided your total coverage falls within certain limits. That way, you can potentially bridge the gap, but still take advantage of the potentially lower rates that you got by buying your first policy at a younger age. And if you still aren't sure how much coverage you need, talking to a financial advisor is a good option.

Of course, your circumstances can always change. So adding a life insurance coverage review to your annual financial review is an excellent way to make sure you aren't falling behind as your life changes. After all, a life insurance policy is meant to protect your loved ones. And it's important to make sure that it's doing the job you need it to do.