Can You Have Too Much Term Life Insurance?

Insurance, Life Insurance
Can You Have Too Much Term Life Insurance?

Buying the right term life insurance policy is an important element of many people’s financial plans, but can you have too much life insurance?

If you do, you’re wasting thousands of dollars on something you don’t need. If you’re wondering “How much life insurance do I need?” consider these ways to avoid buying too much.

Age

Consider the ages of your spouse/partner and your children during your life insurance decision process. Start by estimating when your children will be on their own and no longer in need of financial support. For example, if your children are ages 12 and 14 and you want a policy that would last through age 22, you don’t need a 20- or 30-year term life insurance policy.

You’ll also want to cover your spouse for your lost income until the age at which you would retire. But if you’re 45 now, a 30-year life insurance policy would be more than you need for that purpose.

Current income

One of the primary reasons people buy a term life insurance policy is to cover income replacement. There are many good, free online tools that can help you pinpoint an amount, such as NerdWallet’s life insurance calculator.

If you have substantial savings and money put aside for college, you may not need to replace your entire income. Heck, if you have considerable savings you might not need life insurance at all.

Mortgage and debts

Be sure to wrap your home mortgage, car loans and other debt into your life insurance planning. If you have a $200,000 mortgage and a $4,000 auto loan, you’ll need at least $204,000 in benefits to cover those debts, plus a little more for interest.

Be careful, though. It is possible to have too much coverage here. For example, if you have 15 years left on your mortgage and it’s your primary reason for buying a term life insurance policy, if you purchase a 20- or 30-year one, you’ll be overinsured for those last years.

College expenses

The cost of a higher education in the U.S. has soared twelvefold in the past 30 years. And although that increase has showed signs of slowing in recent years, college is still a huge expense and one that must be factored in to a life insurance policy if you have children.

But before you sign on for a big policy, talk to your spouse about whether you intend to pay for all, or just part of, your child’s college expenses. It will make a big difference in how much life insurance coverage you need.

Funeral costs

The average cost for a funeral, burial and related expenses runs more than $7,000, according to the National Funeral Directors Association. Cremation costs range from $2,000 to $4,000. This obviously varies depending on several factors, but it’s something you want to consider when choosing a life insurance policy. If your primary concern is covering funeral expenses, a small policy will serve your family’s needs.

When it comes to term life insurance, bigger isn’t always better. Look carefully at your income and expenses before choosing a policy to make sure you aren’t paying for coverage you don’t need.

If you’re ready to compare prices, NerdWallet’s life insurance tool can help.

 


Image via iStock.