3 Signs You’re About to Buy Too Much Life Insurance

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Life insurance is a good thing to have, but you don’t want to go overboard. Read on to find out how much is too much. 

If you’re wondering whether life insurance is something you need, all you really have to do is ask yourself if there are people in your life who might get hurt financially in the event of your passing. If the answer is yes, then buying life insurance can be the best way to protect the people you care about.

But one thing you don’t want to do is buy too much life insurance. Even though there are plenty of affordable options out there, it’s silly to strain your budget and take on higher premium costs than necessary. After all, if you can secure adequate coverage at a lower price point, why not take the money you’re saving and use it for other purposes — like actual savings?

Meanwhile, here are a few signs that you may be looking at buying more life insurance than you actually need.

1. You’re replacing more than 10 to 20 times your salary

As a general rule, when buying life insurance, it’s a good idea to aim for a benefit that covers 10 times your salary. And some experts might advise you to aim higher so you’re replacing 20 times your salary. (Suze Orman, for example, thinks you should have at least 20 years of income replaced.)

But you generally do not need 30 or 40 times your salary in life insurance form. So if you earn $50,000 a year, a policy with a $500,000 to $1 million benefit will probably suffice. A $2 million policy is probably overkill.

2. You’re buying a longer term than you really need

If you’re buying term life insurance, which covers you for a preset period of time, you can choose how many years of coverage you want. In many cases, a 20-year term will suffice in protecting your family. You may even want more coverage — say, 25 or 30 years’ worth. Some life insurance companies will write you a longer policy than 30 years. But you probably don’t need one.

Say your kids are five and two years old. If you buy a 30-year term life insurance policy, they’ll be protected through ages 35 and 32. But do you really need to protect them into their 40s? At that point, they’re likely to have stable jobs and careers, so that longer term may not be necessary.

3. You’re buying whole life insurance when term life will suffice

Whole life insurance covers you on a permanent basis, whereas term life insurance could run out on you. (If it does, that’s a good thing — it means you’ve lived.) But the cost of whole life insurance can be far greater than the cost of a term life policy. So for the most part, you’re better off skipping whole life insurance unless you enjoy the idea of handing over heaps of money to a life insurance company.

To illustrate the difference in cost between whole life insurance and term life, Forbes Advisor says that for a healthy 30-year-old non-smoking male, whole life insurance with a $500,000 benefit would cost, on average, about 5.8 times more than a 40-year term life policy with a $500,000 benefit. For a 30-year-old female, the difference in cost between these two policies would be 6.7 times more for whole life coverage.

Forbes acknowledges that this isn’t the best cost comparison because whole life insurance and term life insurance are really two very different products. The point, however, is that there’s a huge difference in cost, and that’s something you must consider.

Buying life insurance is a smart financial move — but buying too much of it isn’t. Run your numbers and consider your coverage needs carefully before locking in expensive premiums that eat up an uncomfortably large chunk of your income.

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