Why Buying Too Little Life Insurance Could Be One of Your Biggest Financial Mistakes

Skimping on life insurance is a decision many people come to regret.  

When buying life insurance, it’s important to make sure the death benefit is large enough to provide for the needs of loved ones. In fact, it's usually best to err on the side of buying a little more coverage than a person might think they need, rather than buying a little less.

There's two important reasons why buying a sufficient amount of life insurance is crucial -- and why not getting a large enough death benefit could be a decision policyholders come to majorly regret.

A policy that's too small means financial hardship for loved ones during a difficult time

The most important reason to buy a sufficient amount of life insurance is to make sure surviving family members don't face financial worries during a time that's already difficult. 

A life insurance policy pays out after a death. Grieving family members don't need to be worried about how to pay for a funeral or where mortgage payments are going to come from or how kids will be able to go to school at the same time as they are trying to cope with the pain of losing a loved one.

Many people also find their income goes up as they age -- and their chances of death also go up too. When buying life insurance at, say, age 20, it's important to think ahead about what income the policyholder is likely to have at age 40 or 50, when they are more likely to pass away. Chances are, they'll have a life -- and obligations -- built around that amount of income, so the death benefit needs to be big enough to replace it. 

Correcting the mistake of buying too little coverage might be impossible 

Unfortunately, another huge reason why buying too little life insurance could turn into a disaster is because it may be impossible to correct. 

Say, for example, a policyholder realizes in their 30s or 40s that the death benefit is not going to be enough to really provide for their spouse or children if they pass away. They may not necessarily be able to just go and get more coverage at that point in time. They might have developed pre-existing conditions that make it impossible to get approved for a policy. Or they might find the premiums are prohibitively expensive because they are older. 

In an even worst-case scenario, a policyholder may not realize they have too little coverage and then they might pass away without proper protection. Obviously, surviving family members would only receive the death benefit on the existing policy -- they can't retroactively go back and buy more coverage on someone who has already passed. So, they could find themselves making hard financial choices.

No one wants these outcomes to be their fate, so it's important to get the right amount of coverage at as young of an age as possible. Term life insurance is usually pretty affordable, even with a good-sized death benefit, and investing in a policy that provides a sufficiently large death benefit to care for loved ones is well worth the cost.