Can You Have Too Much Life Insurance?
Wasting money on unnecessary insurance coverage could affect other financial goals.
Buying life insurance is an essential purchase for anyone on whom people depend. It is important to have sufficient coverage to provide comprehensive protection for your loved ones. But while getting enough insurance is crucial, policyholders also don’t want to buy too much insurance and end up spending more than necessary on premiums.
Here are two possible ways a consumer can end up with more life insurance than they should buy.
1. Getting too large a death benefit
Everyone who buys life insurance is probably doing it to make sure their loved ones avoid financial hardship. Therefore, it is important for policyholders to ensure that their death benefit is high enough. The death benefit will have to cover their funeral expenses, replace their income, and cover other family needs, such as mortgage fees or school fees for surviving children.
But a bigger death benefit isn’t always better. The goal is not to leave surviving family members with tons of wealth, but rather to ensure that they can maintain their standard of living if the insured dies prematurely and unexpectedly. Buying too much death benefit is unnecessary and can result in much higher premium payments than they should be.
To determine the amount of life insurance coverage needed, there are several different approaches that consumers can take. They can use a calculator offered by insurers; take a multiple of a current salary, such as 10 times the amount the policyholder makes; or use the DIME formula and buy enough coverage to pay off debt, replace income, pay off a mortgage, and cover tuition.
Do not buy more than what these formulas specify is necessary, unless there is a specific reason. Otherwise, insurance could become unnecessarily expensive.
2. Be covered for more years than necessary
Most people don’t need life insurance forever. Instead, they need it for a limited period of time while people depend on them to provide income or services.
For example, a young parent may need life insurance for 30 years until their children are grown up, their own house is paid off, and they would leave the workforce to rely on their own money anyway. pension saving. At this point in their life, it is likely that no one will depend on their income anymore.
Whole life policies not only charge higher premiums because the coverage is designed to last indefinitely, but the premiums are also higher because there is an investment component in the policies. The premiums are higher than the policyholder’s actual cost of covering, and the difference is invested – but, unfortunately, the fees are high and the returns are often lower than what would be available from other investments.
It is certainly possible to have too much insurance if policyholders buy coverage for longer than necessary or get a higher death benefit than necessary. It’s important to avoid both of these mistakes to keep life insurance costs reasonable while still getting the protection loved ones really need.