Is it possible to have too much life insurance?

You probably already know why not having any (or enough) life insurance is a problem. It’s because your loved ones won’t have a financial safety net to fall back on if something happened to you. But is it possible to have too much life insurance? Yes, actually, it is possible to have more life insurance than you need.

“If you have people who depend on you financially, you should have term life insurance,” says Brittney Burgett, marketing and communications director at Haven Life. “That doesn’t mean you need to buy the maximum amount available to you.”

The key is to have enough coverage to financially protect your loved ones at a premium rate you can easily afford. Here’s how to figure out how much coverage you should have — and what to do if you have too much.

Why you might have too much life insurance

Sometimes, you might find yourself in a situation where you are paying for more life insurance than you need. Life circumstances might change to where you require a smaller policy — perhaps you paid off your mortgage or your kids are financially dependent. Other times, life insurance policyholders have been oversold on their coverage needs because their sales were tied to a commission earned or company profits. That’s why it’s imperative to do your research, know what kind of policy best fits your financial situation, and to check your coverage needs periodically.

There are a variety of ways to easily understand how much life insurance you need. The rule of thumb to have 5 to 10 times your annual income is a good place to start. Using an online life insurance calculator. Or, seeking the assistance of a life insurance agent.

“When shopping for life insurance, you should seek to have a ballpark understanding of how much coverage you want to buy and what you will need to pay for it,” Burgett says. “Do your research before applying with a specific life insurance company and understand what amount 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, ask yourself whether that person has your best interest in mind. “Trust your gut,” Burgett says.

If you need help figuring out your insurance needs, consider working with a fee-only financial professional who can give you objective advice.

How to know if you are paying for the right coverage

Another situation where you could be paying too much life insurance is if you don’t have the right type of coverage for your needs. There are two main types of life insurance: permanent and term. Because permanent coverage lasts a lifetime and term lasts for a set number of years, permanent life insurance can cost much more than a term life insurance policy.

There are situations where a permanent life insurance policy can be a fit. Those who want life-long life insurance coverage to be a part of their estate planning will need to look at permanent policy options. Additionally, people who are maxing out retirement contributions and have money in a brokerage account might benefit from the cash value benefit with a permanent life policy if they are looking for a way to diversify their streams of retirement income.

“Most U.S. households are not in a situation where they need to consider strategies to diversify their wealth,” Burgett says. “Many families need affordable coverage that will financially protect their loved ones while 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 your loved ones during the years they are most financially dependent — until the kids are adults, the mortgage is paid off or while you have a limited nest egg.  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 don’t have the right type of life insurance to fit your financial needs, reach out to the life insurance agent or company you are working with to understand what your options are. For example, with permanent life insurance, you’ll want to understand if there is a cash surrender value or if you can take advantage of what’s called reduced paid-up (RPU). With the RPU option, for example, you can reduce the whole life insurance death benefit (the payout of the policy) to a point where you no longer need to pay premiums.

“Don’t cancel a life insurance policy before ensuring you can get other coverage in place [if it’s needed] or before you understand the benefits that might be available through your existing coverage,” says Burgett.

How to know if you have too much coverage

In addition to now having the right coverage for your needs, you could also have too much life coverage. With life insurance, the larger the coverage amount, the higher your insurance premium payments will be.

Of course, you don’t want to skimp on coverage and end up with a benefit that’s not large enough to replace your income and cover your loved ones’ needs when you’re gone. But you also don’t want to pay a high premium for more coverage than you need. Then you might find yourself in a situation where you can’t afford to keep up with your monthly payments. For example, it probably doesn’t make sense to pay $60-$100 a month for a $2 million term life policy if your annual income is $50,000. That would mean you have coverage that’s 40x your income — and don’t forget that 5 to 10x your salary rule.

“More isn’t always better when it comes to life insurance,” Burgett says – especially if the cost of your policy is preventing you from making other key financial moves, such as building an emergency fund and contributing the maximum allowed to a 401(k) and health savings account. “Term life insurance is supposed to be a small, affordable part of your budget.”

Assuming a healthy customer were to buy a policy that’s 5 to 10 times their annual salary, the following are some examples of how much a term life insurance policy would cost.

How to figure out how much coverage you need

Ideally, you should have a policy with a death benefit that provides enough of a safety net that your family wouldn’t face financial hardship if you died. You want to be able to replace your income, help pay off big debts you leave behind and, if you have financial dependents, pay for childcare or possibly their college education.

A common rule of thumb for buying life insurance is to have a policy with a benefit that is equal to five to 10 times your annual income. You might opt for the lower end if you don’t have substantial debt and have a small family. You might opt for the higher end of that range if you have a lot of debt and a large family. For example, if your annual income is $50,000, a $500,000 term life policy might be enough for you. A healthy 35-year-old woman can get a 20-year, $500,000 term life policy from Haven Life for about $21 a month.

When considering the term length, you typically want it to be long enough to cover your longest debt, which likely is your mortgage. So, if you’re just starting out and have a 30-year mortgage, you might want a 30-year term life policy. However, you also have to take children into consideration. If, say, you have a 15-year mortgage but have young children, you still might want a term that’s 20 years to cover the cost of your children’s college education if something happened to you.

To get a more accurate estimate of how much coverage you need, use a life insurance calculator. It will help you determine your life insurance needs based on your age, gender, income, number of dependents and financial situation.

What to do if you have too much life insurance

If you have purchased more coverage than you need relative to your income, your financial situation or your family size, most insurers will allow you to reduce the amount of coverage you have. Reach out to your insurance agent or the customer service team at your insurance company and ask if your coverage amount can be lowered. It’s that easy.

When reducing your coverage amount, keep in mind that it’s easier to lessen your coverage than increase it. If you decide later that you want more coverage, you’ll need to go through the life insurance application and underwriting process again. Additionally, your life insurance premium payments will be higher because 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. That’s why it’s important to get the right amount of coverage when you’re young and healthy so you can get the best rate and lock in that pricing for the next 20 or so years.