- It’s a good idea to buy life insurance when you have people who depend on you financially.
- Buying too much life insurance can put an unnecessary strain on your budget.
- Be careful to ensure a reasonable benefit and term and consider opting out of whole life insurance.
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If you’re wondering if life insurance is something you need, all you really need to do is ask yourself if there are people in your life who could suffer financially in the event of your death. 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. While there are plenty of affordable options out there, it’s foolish to strain your budget and incur higher premium costs than necessary. After all, if you can get adequate coverage at a lower cost, why not take the money you save and use it for other purposes — like actual savings?
In the meantime, here are a few signs that you might want to buy more life insurance than you actually need.
1. You replace 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 may advise you to aim higher, so that you replace 20 times your salary. (Suz Orman, for example, thinks it should at least 20 years of income replaced.)
But you don’t usually need 30 or 40 times your salary in the form of life insurance. So if you earn $50,000 a year, a policy with a benefit of $500,000 to $1 million will probably be sufficient. A $2 million policy is probably overkill.
2. You buy a longer term than you really need
If you buy term life insurance that covers you for a pre-set period of time, you can choose how many years of coverage you want. In many cases, a 20-year term will be enough to protect your family. You may even want more coverage – say 25 or 30 years. Some life insurance companies will write you a policy longer than 30 years. But you probably don’t need one.
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Say your kids are five and two years old. If you buy a 30-year term life insurance policy, they will be protected until age 35 and 32. But do you really need to protect them until your 40s? At this point, they are likely to have stable jobs and careers, so a longer period may not be necessary.
3. You buy whole life insurance when term life will suffice
Whole life insurance covers you permanently, while term life insurance can lapse. (If it does, that’s a good thing—it means you lived.) But the cost of whole life insurance can be much greater than the cost of a term life policy. So for the most part, you’re better off skipping whole life insurance, unless you don’t like the idea of giving a life insurance company loads of money.
To illustrate the cost difference between whole life insurance and term life, Forbes Advisor says that for a healthy 30-year-old male non-smoker, 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 benefit of $500,000. For a 30-year-old woman, the price difference between these two policies would be 6.7 times that for lifetime coverage.
Forbes admits that this isn’t the best cost comparison because whole life insurance and term life insurance are really two very different products. However, the point is that there is a huge difference in price and that is something that you have to keep in mind.
Buying life insurance is a smart financial move, but buying too much of it is not. Run your numbers and carefully consider your coverage needs before locking in expensive premiums that eat up an uncomfortably large portion of your income.
Our picks for the best life insurance companies
Life insurance is essential if you have dependents on you. We’ve reviewed the options and developed a best-in-class list of life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.