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What is Too Little Life Insurance? Too Much?

If you are thinking about getting life insurance, or if you are evaluating a policy that you already have, you probably already know there are two main life insurance types: term life insurance and permanent life insurance [1]. Both can provide coverage for the people in your life who would need help if you weren’t around any more. But both options are generally not right for each customer.

Without much forethought, it’s easy to get a life insurance policy that is too big, or too small, for your unique needs. In the first case, you can pay way too much money over the lifetime of your policy. In the other case, your dependents may not have the financial help they need when you pass on. These decisions have long term consequences. Do some reading, get some quotes, and obtain the best life insurance policy for you and yours.

Too Much Life Insurance

One of the most common causes for an individual having too much life insurance would be when they choose permanent life insurance, without actually needing it. There are variations to this model, but generally a permanent life insurance policyholder will 1) pay more money each month to ensure a death benefit to loved ones and dependents, no matter how long the policyholder lives, and 2) have money taken out of each monthly payment to save or accumulate cash value.

This savings component create a permanent life insurance policy’s cash value [2]. Depending on the type of permanent life insurance you have, you might use this growing balance for income, to act as collateral for borrowing, or to increase the death benefit that will eventually go to someone you care about.

Typically, permanent life insurance policies are selected by people with estates, high net worth, those with complex investment needs, or those who want to make sure that their chosen policy benefits those who need it.

For all of these reasons, permanent life insurance can be a great option for many kinds of people. But for others, it may be a little too expensive and complex. This policy might seem like the only way to know for sure that your death benefit will have the effect you desire, but this assurance can usually be achieved other ways. Some of these people may be better served with more affordable and simpler term life insurance.

Too Little Life Insurance

37% of parents [3] with children living at home do not have life insurance, according to the 2015 Bankrate Money Pulse survey. Among the remaining 63% that do have life insurance, one-third have less than $100,000 of coverage. That might seem like a lot of money, and it might be when considered as a lump sum. But $100,000 or less may not be enough to cover the living expenses of a people or people who have, up until this time, depended on you for their support.

If you find yourself in this situation, it’s time to get realistic about how much life insurance coverage your dependents, family, and loved ones actually need. For policyholders of term life insurance plans, additional coverage is probably more affordable than you think, and can certainly provide a better financial solution than insufficient coverage.

For people who purchased life insurance without thinking too much about the details, the end result is frequently too much, or too little coverage. If you haven’t bought life insurance yet, make sure you carefully consider your needs and the needs of those who will receive the death benefit of your policy. In the end, you can have just the right about of life insurance for your unique situation.

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