When should you reduce your life insurance coverage?

As a single parent of two young kids, I made sure to buy life insurance a few years ago. Since they’ve gotten older, I frequently wonder if the death benefit payout from my term life policy would be enough to help pay for their living expenses and college costs if something were to happen to me.

Not having enough life insurance can be a real problem. But what about having too much term life coverage? Is that a thing?

The short answer is yes.

When it comes to the long-term peace of mind life insurance can offer, you can never have too much of that. But maybe you’ve gone through a life change since you bought the policy several years ago. You paid off your house, you made some real traction on building wealth, or your child is officially a financially independent adult. If that’s the case, you might find that the term coverage you have is a bit more than you need.

Instead of canceling your policy or paying for $1 million in term life insurance coverage when you only need $500,000, did you know that many insurers will let you reduce your face amount?

Many insurers allow for policy changes

Reducing the amount of coverage you have is usually not a big deal. Many policies will let you make a change to your policy at least once during the life of the policy. At Haven Life, for instance, Haven Term policyholders can reduce their policy amount at any time and multiple times (assuming it’s not lower than our current policy minimum of $250,000).

Keep in mind that increasing your coverage amount almost always requires a medical exam unless it’s within a certain timeframe of when you purchased the policy. So, it’s wise to ensure you really want to have less coverage for the rest of your term length.

If you’re finding yourself in a situation where you think you have too much coverage, take a moment to recalculate your life insurance needs and see if the recommendation is less than the current coverage you have. If so, contact your life insurance company or agency and find out the logistics of reducing your coverage.

If you are a Haven Term policyholder, you can learn more about how to decrease your coverage amount in the frequently asked questions section of our website.

How reducing coverage will impact your premium pricing

Generally speaking, the bigger your policy, the higher your life insurance premium. Dialing back your term life coverage will reduce your life insurance rates because you have already locked in your rate class when you initially bought the policy. (This is called a level term premium.)

For example, if, as a 30-year-old woman in excellent health, you bought a 30-year, $1 million policy, your premium could be around $43 per month as a Haven Term policyholder. Twenty years later, at 50 years old, if you decided you really only needed a $500,000 policy for the remaining 10 years of your term length, you would still pay the pricing for a 30-year-old at that face amount, which is about $25.

That’s $18 a month in savings for the next 10 years — or $2,160 total. (It’s worth saying, however, that it reduces your policy coverage by half.)

Life insurance, and term life insurance in particular, can be purchased for a coverage term intended to help financially protect your loved ones during the years they need it most — until your mortgage and other debts are paid off, the kids are adults, and your spouse is at or near retirement, for example.

It’s likely that over the course of all those years and life milestones that your coverage needs will change. You may need to buy more coverage at some point, or you might find that you have a need for less. If you’re unsure, reach out to your life insurance provider and find out what your best options might be to keep you from being underinsured or overpaying for coverage.