17 November 2018

Underinsurance: what is it and why is it a problem?

5 min read



Underinsurance: what is it and why is it a problem?

If you were to die unexpectedly, your family might struggle to cope without your financial support. In 2016, two-in-five of all deaths left partners behind to cope by themselves.

Many people don’t like to think about what would happen if they passed away. However, having a plan in place could be the lifeline your family needs if you are no longer able to care for them or provide income for the household.

One way to give you and your family peace of mind is to take out life insurance, which pays a lump sum on your death. Many people think that they would like to have cover, but don’t get round to sorting it out.

This means that there is a risk that the family could be underinsured, and the possibility that they might face a financial shock if your were no longer there to help.

What is underinsurance?

It means not having enough cover for unexpected events. In the case of life insurance, this might mean you don’t have a policy at all or that the one you do have won’t cover all potential costs such as rent or a mortgage.

What happens if you are underinsured?

If you don’t have enough cover, then your family may suffer a shortfall. They could struggle to pay essential household bills and may find it difficult to replace the income lost now that you are no longer around.

How to avoid being underinsured

Start by working out how much life insurance you need. How much money would your family and dependants would require to maintain their standard of living without your income?

Don’t forget to include household bills, mortgage payments and other essentials in your calculations. Also factor in one-off costs such as insurance for your home and car, phone and broadband and even extra help around the house for your partner or childcare costs.

Examples of underinsurance

If you have a young family, people who depend on you or an outstanding mortgage, then without life insurance you may be underinsured.

Why life-insurance protection is important

Life Insurance is a simple, affordable product with no savings or investment element. Premiums depend on when you start and tend to be low-cost.

It is inexpensive to buy and easy to set up – and could give you and your family the peace of mind that comes with knowing they will receive a lump sum to help them at a difficult time.

But remember, you’ll need to keep paying your contribution each month, otherwise your cover will end.

Whatever you decide, it is important to think about how your family might manage financially without you.

1. Office for National Statistics, 12 October 2017: Deaths registered in England and Wales (series DR)

2. Royal London State of the Protection Nation Index.