The shortfall on endowment mortgages could reach £30bn, according to the UK's main financial watchdog.
Millions are relying on endowment policies to pay off their mortgage
The Financial Services Authority (FSA) submitted the estimate to the Treasury Select Committee's inquiry into endowments and long-term savings.
The committee quizzed the heads of the UK's biggest insurance companies on Tuesday over endowment shortfalls.
The head of the Prudential told MPs he regretted any endowment mis-selling by his firm.
Prompt action needed
An FSA spokesman said it had been asked to estimate the shortfall by the Treasury Select Committee.
He added that if policyholders were concerned about the risk of their endowment not paying off all their mortgage, they should act now.
In calculating the figure, the FSA is assuming that 5.3 million policies could have an average shortfall of £5,500 each.
It does not take into account improved investment performance or that people would act on their shortfalls.
The City watchdog has previously estimated up to 3.5 million households could be facing shortfalls.
At the meeting of the select committee on Tuesday a leading insurance executive expressed regret over any endowment mis-selling by his firm.
Jonathan Bloomer, group chief executive of Prudential, told the Treasury Select Committee: "I very much regret any mis-selling that we have done."
Research by the Financial Services Consumer Panel indicates half of endowments may have been mis-sold.
Also at the hearing were the heads of Aviva, Legal & General, Royal & Sun Alliance and Standard Life.
MPs accused insurance companies present of not being "upfront" about informing their customers that they could lodge claims for mis-selling.
They remarked that the number of complaints made so far were "staggeringly low".
Shortfalls and complaints
Standard Life: Average shortfall of £4,900 (February 2003 calculation); 73% red letters and 13% amber
Royal & Sun Alliance: Average shortfall is £7,000; 81% received red letters
Legal & General: Average shortfall of £6,700; 3.8% of policyholders have complained, with 70% of those upheld
Prudential: Average shortfall of £3,500 (Prudential policies) and £5,100 on Scottish Amicable policies
Norwich Union: Average shortfall of £5,650; 4% have complained, with 2% upheld
Only 4% of policyholders at Aviva, which owns Norwich Union, have complained, yet half of these have had their complaints upheld.
None of the insurance companies questioned had informed their endowment customers about how to make a complaint within the text of shortfall warning letters.
Insurance industry chiefs also came under fire for receiving big pay rises at a time when policyholder values were being cut.
Other details of policyholder shortfalls and the level of complaints emerged during the meeting.
As many as 81% of Royal & Sun Alliance endowment holders have received red letters - the highest warning - and its policyholders were facing an average shortfall of £7,000.
Insurance companies said they were upholding more customer complaints.
Millions of people are relying on an endowment policy - a type of life insurance policy - to pay off their mortgage.
Approximately 11 million policies were sold to about six million households.
But falling share prices in recent years means an increasing number of endowment holders are now facing shortfalls on their policies.