Can you have too much life insurance?
When shopping for life insurance, one of the most significant considerations to keep in mind is how much coverage you’ll need. You’ll need to account for factors like your overall budget, current income, and any future financial needs and goals, like paying off student loans, making mortgage payments, or putting children through school.
With so much to consider when choosing a policy, you may wonder if you can actually end up with too much coverage. While yes, it is possible to overpay for life insurance or to have more coverage than you need, there are plenty of ways to ensure you have the right coverage at the right price. Let’s walk through what you need to know when choosing a coverage amount for your life insurance policy.
How much life insurance do I really need?
Several options exist for your life insurance coverage, including term life insurance, which lasts for a specified amount of time. Term lengths typically range anywhere from 10 to 30 years. This type of coverage is often one of the most affordable life insurance options because you only buy as much as you need.
Permanent life insurance, by comparison, does not expire and is meant to provide insurance coverage for the remainder of your life. Permanent life insurance policies, like universal and whole life insurance, often have higher premiums than term life insurance rates. However, unlike term life insurance, they typically come with a cash value component that acts as a savings account and accumulates over time.
Whatever policy option you decide on, factor your premiums into your budget. The best way to avoid overpaying premiums is to figure out how much life insurance you need. Life insurance needs vary from person to person, but a general rule of thumb is to buy 10-15 times your annual income.
The total amount of life insurance you need will likely differ based on your circumstances. Two major ways to help determine your life insurance coverage needs include:
1. Consider your current financial obligations and expenses.
If something happened to you today, what would it take to replace your current income and cover your existing expenses? Would you want to provide a substantial amount of financial cushion for your family? A basic rundown of your life insurance needs should include:
Existing debt, including credit card debt, mortgage payments, and car payments
Final expenses
Income replacement for a number of years
Education expenses for dependents, like a child’s college education
Most life insurance policies aren’t subject to estate taxes or income taxes, but the cash value may not cover what you think it will. If you find that your current life insurance needs don’t match up with these expenses, this is called a coverage gap. In many cases, you should reduce that gap as much as possible—either through adjusting your existing policy or buying a new one.
2. Use a calculator or trusted financial advisor to decide on the right amount of coverage.
To make the process of shopping for coverage even easier, you can receive a ballpark estimate of your insurance needs by using a life insurance calculator. If you prefer a guided approach, a trusted financial advisor can also help you calculate how much life insurance you should buy. They’ll walk you through the process of applying for coverage, whether you’re seeking your very first life insurance policy or shopping for one to supplement your existing insurance.
How often should I adjust my life insurance coverage?
If you currently have life insurance, it’s possible you could be overpaying for your policy. However, you might also have insufficient coverage, particularly if you've recently undergone a significant life change. Reassessing your coverage as you go through different phases of life is a great way to ensure whether or not your coverage is still appropriate for your needs.
Getting married, having children, starting a new job, launching a business, or retiring are all situations that warrant a review of your existing life insurance policy. If you've recently gone through any of those life changes or something similar to those milestones, it may be necessary to adjust your life insurance coverage.
How can I lower my life insurance rates without changing my benefits?
One of the biggest benefits of life insurance is financial security, so naturally, you want to ensure that your life insurance payments fit into your budget. If your life insurance premiums are currently too high, you still have options beyond changing your current benefits. Ways to lower your life insurance premiums without changing your coverage include:
Many insurance companies will offer reduced premiums in exchange for switching from monthly to annual premiums.
Making lifestyle changes such as quitting smoking, starting an exercise routine, or losing weight can impact your life insurance rates. Even though your life insurance premiums are set during the initial underwriting process, you can make substantial changes to your premiums through a process called reconsideration.1 With reconsideration, you can apply for life insurance rates under a different health rating classification, but based on the age you were when you first applied for life insurance coverage. However, reconsideration involves retaking the life insurance medical exam after a year or two of your policy being in force.
You can also shop quotes from different life insurance companies to find lower rates without sacrificing your coverage needs.
Will my premiums increase if I buy a different life insurance policy now?
Life insurance costs tend to increase as you get older, so switching insurance policies may lead to increased premiums. Before you cancel your existing policy and try to find a lower priced one, compare all your options. Based on your needs and the available rates, you may not need to decrease coverage.
How do I know if I have too much life insurance?
In addition to evaluating your current financial responsibilities and future commitments against the overall death benefit of your life insurance policy, there are other indicators that you might be overinsured. If the monthly or yearly expense of your life insurance policy exceeds your financial plan, it might be beneficial to consider reducing your coverage from a whole life insurance policy to a more economical term life one or to explore life insurance quotes for a policy offering lower premiums.
SelectQuote Can Help You Buy the Right Amount of Life Insurance and Avoid Paying Too Much
Whether you have too much life insurance coverage or you are paying higher premiums than you’d like, SelectQuote can help evaluate your life insurance coverage and determine the next steps. We compare quotes from some of the most trusted insurance carriers at once to help you find life insurance rates that fit your budget and coverage that meets your needs.
Sources
