How to avoid buying too much life insurance

You probably understand the gist of life insurance — you pay a regular premium, and in exchange your loved ones receive a death benefit if you die. Simple, right?

But how much life insurance coverage should you get? And is it possible to buy too much?

Find out how to determine the right amount of life insurance coverage for you and your family. Because it is absolutely possible to buy too much coverage, and understanding why will help you get the right amount for you, without paying too much for it.

What to look for when buying life insurance

While it might seem weird for a life insurance agency to warn you about buying too much coverage, our goal is to help you get the best policy for your needs — not the most expensive.

So let’s start by talking about shopping for life insurance. Generally speaking, you’ll need to figure out how much coverage you want to buy before you apply, as that amount will help determine the premium you’ll pay. Depending on your age, your health and where you get life insurance, there might also be a limit on how much coverage you can buy.

The coverage amount of a death benefit is the lump-sum payment beneficiaries receive if you die while your policy is active. This lump sum payout can help cover living expenses, mortgage payments, education costs, and other expenses until your family can fully replace your income.

There are multiple types of life insurance policies, with the two most common being permanent life coverage and term life insurance.

Permanent life insurance

Permanent life insurance is just that: Permanent. Typically, your policy remains in place until you die, so long as you pay your monthly premiums. Many types of permanent life insurance policies, including whole life insurance, accumulate cash value that can be accessed during the insured person’s lifetime. This money can even be used to pay future premiums.

The pros of permanent life insurance include:

• Lifetime coverage
• Cash value

The cons of permanent life insurance include:

• Cost: Because it covers you during your older years, when you’re likelier to have health issues, it can cost a lot more than other options
• Overcoverage: For many people, life insurance is a way to offset the loss of family income if they die. In later years — when you’re retired, your kids are financially independent, and / or your mortgage is paid off — you might need less life insurance coverage, or might not need a policy at all.

Term life insurance

Another type of life insurance is term life insurance. It provides coverage for a specified period, typically 10, 15, 20, 25 or 30 years, offering a death benefit to beneficiaries if the insured person passes away during the term. Some of the pros of term life insurance:

• Affordable premiums: Term life insurance typically offers lower premiums than permanent life insurance policies. This affordability makes it more accessible for individuals or families seeking essential life insurance coverage.
• Flexibility:Term life insurance allows you to choose the coverage duration that aligns with your needs. You’re less likely to buy too much coverage when you tie your policy to a specific goal, like paying off a mortgage loan.
• Simplicity:Term life insurance is straightforward. It focuses solely on providing a death benefit during the specified term, without additional components like cash value accumulation or investment features, simplifying the decision-making process.

Some cons of term life insurance:

• No cash value:Unlike permanent life insurance policies, term life insurance does not build cash value over time. If you outlive the policy term, you will not receive any return on the premiums paid, aside from the peace of mind that being insured can provide.
• Limited duration:Term life insurance only provides coverage for the specified term you chose. Once the policy term expires, you may be able to continue the policy, but it would be at significantly higher premiums. You also might be able to apply for a new policy, which could be more expensive due to age or potential health changes.

How much life insurance do you need?

Choosing the right coverage amount can be challenging, as you might feel tempted to go for a higher amount than your family needs. As a general rule, most experts recommend choosing a death benefit equal to 5 to 10 times your current salary to replace your income for a substantial period.

Individual circumstances might vary, but this rule of thumb is based on several factors and financial considerations, such as your outstanding debts or ongoing expenses (mortgage, car payment, etc.). It prevents you from overestimating future expenses and buying more coverage than your family really needs.

You should aim to maintain coverage while sticking to your household budget. Buying more coverage means higher life insurance rates, so choosing a reasonable death benefit will help keep your payments more affordable.

How to choose a term length

It can be tempting to choose the longest term length because it increases the possibility of your beneficiaries receiving the death benefit. But it’s more effective to use life insurance to cover a period of time when you have a specific financial objective.

Before choosing a policy term, think about what your loved ones would need if you suddenly passed away. Some financial goals you might want to consider include:

• A child’s financial independence
• A mortgage loan
• A car or other vehicle loan
• Outstanding business debts
• Anticipated or outstanding medical bills
• Lost income

For example, if you have a 20-year mortgage, you can opt for a 20-year term life insurance policy, so your beneficiaries will have money to help cover the outstanding mortgage balance.

Use a life insurance calculator to learn more about the coverage you need

Looking for an easier way to figure out how much you need in life insurance? Free calculators like this one from Haven Life can recommend a specific term policy benefit using data points like:

• Your age
• Your weight
• Nicotine and tobacco usage
• An average estimate of your current health
• Where you live and how much you spend on housing costs

If you don’t know how much life insurance you should purchase, this calculator can be an excellent place to start.

Final thoughts

Bottom line, the amount of life insurance needed will vary from person to person.

You can avoid buying too much life insurance by choosing a total death benefit that’s between 5 to 10 times your salary, opting for term coverage over permanent  coverage, and selecting a suitable term length tied to a financial goal. You might also want to use a life insurance calculator to learn more about your recommended general death benefit.

Start by getting a free online life insurance quote today.