You probably already know why don't you having any (or enough) life insurance coverage is a concern. It's because your loved ones won't have an economic back-up to select from if something happened to you. But can you really have too much life insurance? Yes, actually, it is possible to have more life insurance than you need.
“If you've people who depend on you financially, you should have term life insurance,” says Brittney Burgett, marketing and communications director at Haven Life. “That does not mean you have to purchase the maximum amount open to you.”
The key is to possess enough coverage to financially protect your loved ones confined rate it is simple to afford. Here's how to work out how much coverage you ought to have – and just what to do for those who have an excessive amount of.
Why you might have an excessive amount of life insurance
Sometimes, you will probably find yourself in times where you are spending money on more life insurance coverage than you'll need. Life circumstances might switch to in which you need a smaller policy – maybe you paid off your mortgage or your children are financially dependent. In other cases, life insurance policyholders happen to be oversold on their coverage needs as their sales were associated with a commission earned or company profits. That's why it's important to seek information, understand what kind of policy best fits your financial situation, and to look at your coverage needs periodically.
There are a variety of methods to easily understand how much life insurance you need. The general rule to have Five to ten times your annual earnings are a good place to start. Utilizing an online life insurance calculator. Or, choosing the aid of a life insurance agent.
“When shopping for life insurance, you should aim to possess a ballpark understanding of just how much coverage you want to buy and just what you will have to pay for it,” Burgett says. “Do your research before applying having a specific life insurance company and understand what quantity of coverage you want to buy.”
If you are being encouraged to consider a more expensive insurance policy or to buy more coverage than you previously had in mind, think about whether that individual has your own interest in your mind. “Trust your gut,” Burgett says.
If you need help figuring out your insurance needs, consider using a fee-only financial professional who can provide you with objective advice.
How to understand if you're paying for the best coverage
Another situation enabling you to be paying too much life insurance is that if you do not have the right kind of coverage for your requirements. There are two main kinds of life insurance coverage: permanent and term. Because permanent coverage lasts a lifetime and term can last for a collection period of time, permanent life insurance can cost much more than a term life policy.
There are situations in which a permanent life insurance policy can be a fit. Those who want life-long life insurance coverage to become a part of their estate planning will have to look at permanent policy options. Additionally, people who are maxing out retirement contributions and also have money in a brokerage account might take advantage of the cash value benefit having a permanent life policy if they are searching for a way to diversify their streams of retirement income.
“Most U.S. households are not in a situation where they have to consider strategies to diversify their wealth,” Burgett says. “Many families need affordable coverage that will financially protect themselves when they work toward other goals like building emergency savings, paying off debt, or maxing out retirement accounts.” Term life insurance is a simple, cost-effective type of life insurance that covers all your family members during the years they're most financially dependent — before the kids are adults, the mortgage pays off or when you have a limited amount of money. They can get that coverage with a term life policy with a term that is long enough to cover those needs.
If you find yourself in a situation where you not have the right kind of life insurance to fit your financial needs, get in touch with the life insurance agent or company you're dealing with to understand what your options are. For example, with permanent life insurance, you will want to understand if there is a cash surrender value or you can engage in what's called reduced paid-up (RPU). With the RPU option, for instance, you can reduce the whole life death benefit (the payout of the policy) to a point where you no more need to pay premiums.
“Don't cancel a life insurance policy before ensuring you can get other coverage in position [if it's needed] or before you decide to comprehend the benefits that might be available through your existing coverage,” says Burgett.
How to know if you have too much coverage
In accessory for now getting the right coverage for your needs, you might must much life coverage. With life insurance coverage, the larger the coverage amount, the larger your insurance premium payments is going to be.
Of course, you don't want to skimp on coverage and get a benefit that's not large enough to replace your earnings and canopy your loved ones' needs when you're gone. But you also don't want to pay a higher premium for additional coverage than you'll need. You very well may find yourself in a situation where you can not afford to keep up with your monthly obligations. For example, it probably doesn't make sense to pay $60-$100 per month for any $2 million term life insurance policy in case your annual income is $50,000. That will mean you have coverage that's 40x your earnings – and don't forget that 5 to 10x your salary rule.
“More isn't always better when it comes to life insurance coverage,” Burgett says – particularly if the cost of your policy is preventing you against making other key financial moves, such as building an emergency fund and contributing the maximum permitted to a 401(k) and health savings account. “Term life insurance coverage is supposed to be a little, affordable part of your budget.”
Assuming a healthy customer were to purchase a policy that's 5 to 10 times their annual salary, the following are a few examples of methods much a phrase life insurance policy would cost.
Quotes for term life insurance
How to determine how much coverage you need
Ideally, you should have an insurance policy having a death benefit that gives a good enough back-up that your family wouldn't face financial hardship if you died. You want to have the ability to replace your income, help pay off big debts you leave behind and, for those who have financial dependents, pay for childcare or possibly their higher education.
A common guideline for purchasing life insurance coverage would be to have a policy having a benefit that is equal to five to Ten times your annual income. You may choose the lower end if you don't have substantial debt and also have a small family. You may choose the more advanced of this range if you have a lot of debt along with a large family. For instance, if your annual income is $50,000, a $500,000 term life insurance policy may be enough for you personally. A healthy 35-year-old woman could possibly get a 20-year, $500,000 term life policy from Haven Life for around $21 per month.
When considering the term length, you normally would like it to be of sufficient length to pay for your longest debt, which likely is the mortgage. So, if you are just starting out and also have a 30-year mortgage, you might want a 30-year term life policy. However, you might also need to consider children into consideration. If, say, you have a 15-year mortgage but have young kids, you still might want a term that's Two decades to pay for the cost of your children's higher education if something became of you.
To get a better estimate of methods much coverage you'll need, make use of a life insurance coverage calculator. It can help you identify your lifetime insurance needs based on how old you are, gender, income, number of dependents and financial situation.
What to complete if you have too much life insurance
If you have purchased more coverage than you need relative to your income, your funds or your family size, most insurers will help you to reduce the quantity of coverage you have. Get in touch with your insurance agent or even the customer service team at the insurance company and ask in case your coverage amount could be lowered. It's that easy.
When lowering your coverage amount, keep in mind that it's easier to lessen your coverage than increase it. If you decide later that you would like more coverage, you'll need to go through the life insurance coverage application and underwriting process again. Additionally, your life insurance premium payments is going to be higher since you will be older and your health might have changed. In fact, if you've developed any serious health conditions, it might be difficult to get coverage. This is exactly why it's important to obtain the right amount of coverage when you’re healthy and young to get the very best rate and lock in that pricing for the following 20 or so years.