Do I Have Too Much Life Insurance?

Last updated on January 12, 2021 by Eric Rosenberg in Life Settlements, Retirement Planning

Married couple stand on road discussing whether or not they are paying for too much life insurance.

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Life insurance is an important part of your personal finances, but is there such a thing as too much life insurance? The answer is a big yes. While far more people are underinsured than overloaded on insurance, getting too much life insurance leads to big, unnecessary monthly premiums.

Today, we are going to look at what it takes to have too much life insurance, how to assess your actual life insurance needs, and what you can do if you find your life insurance coverage is more than your family needs.

If you find you do have too much life insurance, you may be able to sell your life insurance for a cash payout. Click here to learn how to sell a term life insurance policy.

Can You Have Too Much Life Insurance?

If you own term life insurance or whole life insurance, you made a good decision to protect your loved ones. The death benefit from a life insurance policy is designed for income replacement in the worst case scenario that you’re no longer around. But how do you know if you have the right amount of life insurance?

A good estimate for your family’s financial needs is to look at your annual expenses (not income) and multiply by 10. If your family spends $50,000 per year, you would want a minimum of $500,000 in life insurance.

But what if your family spends $50,000 per year and you have $2 million in life insurance? Is that overkill? The answer is probably yes. Many families like to consider things like student loans, car loans, and credit card balances in addition to an income replacement goal. Funeral expenses, while not a fun topic, are also important. Final expenses after losing a family member can quickly exceed $10,000 in many situations.

Also, consider the typical health care costs your spouse may incur in the future. While most life insurance is not subject to an estate tax or income tax, the cash value of a life insurance payout may not go as far as you think. Even when in excellent health, it is important to save money for future health care expenses. Once you take higher education and related expenses into account, it is easy to see how someone making $100,000 per year could need well over $1 million in life insurance, for example.

If you add up all of your financial priorities and family’s financial needs and still have more life insurance over that amount, you may be overpaying each month thanks to too much life insurance.

How to Know if You’re Buying Too Much Life Insurance

If you are in the buying stages of the life insurance lifecycle, think about the long-term needs of your family. A 30-year term life insurance policy is often cheaper than most people realize. And the monthly cost for the potential lump sum life insurance policy payout of the best life insurance policies is well worth it.

When doing the math on your own life insurance, consider future Social Security income, investments, and other assets. Also, take out any group life insurance you get from work, as you most likely can’t take that with you when changing jobs in the future. In financial planning, you can only count on term coverage or whole life that is portable and moves with you regardless of where you work.

Insurance companies are always happy to sell you more insurance. If you think you have more insurance than needed, you can check out a life insurance calculator or work with a trusted financial advisor to decide the best combination of life insurance products for your needs.

How to Know if You’re Paying Too Much for Life Insurance

Life insurance companies are in business to make money. It is important to shop around for multiple life insurance quotes any time you are interested in new life insurance. Typically a term policy is the most cost-effective option for life insurance for the average family.

Life insurance rates typically go up as you age, so the sooner you can lock in a long-term life insurance policy, the better. Life insurance agents often have access to systems that can provide multiple, competitive quotes with estimated life insurance rates in just a few minutes.

To compare a new policy to the insurance you already have today, life insurance agents can offer price comparisons. If you are excellent health, you may qualify for a life policy at a very, very low monthly cost. Life insurance rates are priced in a cost per $1,000 of coverage, so if you want to top-up existing coverage or replace a current policy, you can usually use your rate for a policy of any size.

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How to Get Rid of Excess Life Insurance if You Don’t Need it All

If you do decide you don’t need existing term insurance, you may be able to sell the life insurance policy for a one-time payment. When selling life insurance, an investor takes over monthly premiums and gets to keep any future death benefit. Today, that saves you a monthly cost and puts a cash payment in your bank account quickly.

In a life settlement, you can sell all or a portion of your life insurance policy to investors. Life settlement companies connect groups of investors with groups of policyholders to facilitate the life insurance sale process.

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Depending on how the life settlement is structured, you may be able to retain a portion of the cash settlement. Speaking with a trusted life insurance settlement provider can give you the insights you need to make the best decision for you and your family.

If you are critically or terminally ill, a viatical settlement may offer you a cash payout from an existing life insurance policy.

Don’t Waste Money on Too Much Life Insurance

Life insurance is an inexpensive and effective way to protect your family, but it isn’t free.

If you have too much life insurance, you can sell a portion that you don’t need. If you have enough in savings that you no longer need life insurance at all, you can sell the whole thing for income and stop making those monthly premium payments.

Being underinsured is a risk, but being overinsured is expensive. If you have too much life insurance, turn the expense into an income. That’s the smartest financial move.

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Eric Rosenberg
Eric Rosenberg is a personal finance expert residing in Southern California. He holds a BSBA in finance from the University of Colorado and an MBA in finance from the University of Denver. He has over a decade of experience writing about financial topics online. His work has been featured on Business Insider, Investopedia, The Balance, Investor Junkie, and a wide range of quality financial publications.

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