When it comes to life insurance, most people think that they more they have, the better. Of course, you want to ensure that your loved ones are taken care of when you pass away; but, like anything in life, too much life insurance isn’t always a good thing.
In fact, many insurance agents and financial experts have revealed that many people are carrying more life insurance than they actually need, and that too much coverage can be detrimental. The goal of life insurance coverage is to provide for those who are dependent on you when you die, and it’s important to make sure that you have the right amount of coverage. But why is having too much insurance a bad thing, how much is too much, and how can you tell if you have more coverage than you need? Keep on reading to find out.
Why Too Much Life Insurance is a Bad Thing
In terms of life insurance, you would think that the more you have the better; but, that’s not really the case. In fact, there are several reasons why having more insurance than you need isn’t a good thing.
- You pay too much. The #1 reason why having too much coverage is a bad thing is because of the expense. Life insurance can be pretty pricey, and if you’re carrying more coverage than you need, you could end up spending a tremendous amount of your income paying premiums.
- It adds tax liability to your estate. While income taxes aren’t taken out of life insurance, estate taxes are. Therefore, if you have one huge policy or if you have a handful of smaller policies, the more estate taxes are going to be taken out when you pass away; that’s not a good thing for your beneficiaries.
- You could use that money for other things. If you have too much life insurance, as mentioned, you could be paying an exorbitant amount in premiums. You could be spending money on something you really don’t need instead of spending it on something you really do need (or want).
How Much is Too Much?
Every person’s needs are different, which means that the amount of life insurance coverage you should have really depends on your unique needs. To determine how much coverage you should carry, consider the following:
- Your income. The main reason people purchase life insurance is to serve as income replacement when they pass away. But, if you have a sizeable amount of money put away or invested elsewhere, you might not need to carry a policy, no matter how much money you make; in fact, if you have a lot of money socked away, you might not even need a policy at all!
- Your debts. You’ll want your life insurance payout to cover the cost of your debts, such as your mortgage, car loans, credit cards, and any other debts you acquire over a lifetime. You’ll also want a bit more to cover any interest. However, you could have too much coverage for your debts; for example, if you only have 10 years left on your mortgage and have a 20 or 30 year term policy, you have too much coverage.
- Death costs. It’s hard to think about, death costs should also be considered when choosing how much coverage you should carry for your life insurance policy. The average cost of death expenses, including a funeral and burial, is between $7,000 and $10,000; but, if you’re considering cremation, the cost is significantly less.
How Can You Tell If You Have Too Much Life Insurance
It can be hard to tell if you’re carrying too much life insurance coverage. You definitely want to make sure that you have enough coverage to replace your income, cover the cost of your debts, and assist with the cost of our funeral; however, you don’t want to have so much coverage that you’re paying through the nose on your premiums and that your beneficiaries could be hit by high estate taxes.
To find out if you are carrying too much life insurance, sit down with a financial advisor or an insurance agent. Together, you can assess financial needs and determine whether or not you have too much life insurance. If it is determined that you have way more coverage than you need, consider cutting it back so that you can save money now and benefit your beneficiaries when you do pass away, while also ensuring that your loved ones are taken care of financially.
Do, however, keep in mind that you may have to deal with penalties for cutting coverage, so consider such fees before and decide if they will harm you or won’t really make a difference at all before you reduce your coverage.