2 Signs You're About to Purchase Too Much Life Insurance – The Motley Fool

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Having life insurance is important, but you don’t want to go overboard.

Key points

Too much life insurance could make your policy unaffordable.It’s important to assess your death benefit needs before paying up.

Buying a life insurance policy is a good way to protect your loved ones in the event of your passing. But the downside to putting life insurance in place is having to cover the cost of your premiums.

Now there are different factors that can drive your premium costs up. Some, like your health, may be out of your control to some degree. But one factor you can control is how large a death benefit your loved ones collect in the event of your passing.

As you might imagine, the higher a death benefit your policy allows for, the more you might pay for it. And if these signs apply to you, it means you may be on the verge of overspending on life insurance.

1. Your death benefit well exceeds 10 times your salary

There are different formulas you can use to determine how much life insurance coverage to put into place. One convention is to take your salary and multiply it by 10. If you earn $80,000 a year, a policy with an $800,000 death benefit may be appropriate.

That said, if you earn $80,000 a year, you probably don’t need a life insurance policy that will pay out $3 million upon your death. This doesn’t mean an insurance company won’t sell you one — but it means you’ll pay higher premium costs for added coverage you may not really need.

2. Your death benefit well exceeds your salary plus existing debts

Another formula you might use when determining how much life insurance to buy is 10 times your current salary plus the balance of your existing debts. So, say you earn $80,000 a year and also have a mortgage with a $200,000 remaining balance. In that case, you may decide to buy a policy with a $1 million death benefit. That way, your beneficiaries could, in the event of your passing, pay off your home and have enough money to replace your salary for a decade.

But again, in this situation, a $3 million policy is probably excessive. Even if you want to err on the side of caution and replace 20 years of income plus your mortgage, that still doesn’t come close to $3 million.

Don’t overspend on life insurance

The more money you spend on life insurance, the less you’ll have available for other bills. Also, the harder it will be to keep up with your premium costs, to the point where you may have no choice but to let your policy lapse. That’s why it’s important to come up with a reasonable sum for your death benefit rather than err on the side of a larger one.

You might think you’re doing the right thing for your loved ones by securing a higher death benefit. But if doing so upends your family’s finances in the near term and puts you in a position where you can no longer afford your life insurance, then you’ll actually be doing the opposite.

Life Insurance Protection for You and Your Family

While many varieties of insurance coverage are designed to help protect a person’s family and assets, life insurance is a vital type of protection. The right life insurance can help protect the people that depend on you the most if you should pass away. Choosing the right life insurance policy is critical to ensure your loved ones are protected properly. We have sorted through the various options to provide you with our choices for the best life insurance policies available today.