Buying the right amount of life insurance isn’t easy, mostly because there are so many factors at play. You need enough term life insurance to replace your income, pay off your debts and cover future expenditures. Of course, you don’t know how your life will look in five, ten or twenty years.
As such, many people buy a little more life insurance than they need. If they determine they need $750,000 in term coverage, for example, they might bump it up to $1,000,000 in coverage to sleep better at night.
Is there such a thing as ‘too much’ life insurance?
But can you have too much life insurance coverage? A lot of experts would say “no.” If you leave behind enough money to take care of your responsibilities and then some, your family will be grateful.
On the flip side, you want to buy a policy that’s affordable enough to keep up with the monthly payments. Since term life insurance is good for up to 30 years, the affordability component — how much you’ll pay for coverage every month — is crucial.
(Note, we're talking term life insurance, because whole life insurance is often too much for middle-income Americans right off the bat. You can find out when whole life insurance is better than term life insurance here.)
How to get into the ‘goldilocks zone’
That makes buying the right amount of life insurance tricky. If you get too much, you may pay for coverage you don’t really need. If you don’t buy enough, you could leave your family struggling. Here’s how to get it just right.
1. Experiment with a life insurance calculator.
Thanks to the wonders of the internet, it’s easier than ever to get a ballpark figure for how much life insurance you need. Policygenius’ life insurance calculator can help you quickly figure out an adequate and affordable amount based on your income, debt, future expenditures and how long you plan to work.
Keep in mind this is just an estimate. You can customize your level of coverage.
2. Figure out how much you can actually afford.
The best part about term life insurance is that it’s especially affordable. A 20-year, $500,000 policy can be as low as $20 per month for a 37-year-old woman, for example, and prices go down the younger you are.
Still, you should figure out what to cut from your budget so you can keep up with your policy payments for years or even decades. At $20 or $30 per month, that may only involve a single monthly night out with friends.
3. Consider how your life might change over time.
For example, maybe you rent now but plan to buy a home in the next five years. Perhaps you’re not a parent, but hope to be in the near future. Perhaps you’re in sales but expect to enter middle management within a decade.
Keep these factors in mind as you settle on a coverage amount. Remember, you can buy more term life coverage later on as your needs change. Almost all increases will have to go through medical underwriting again, though, so it's worth pre-planning. (More on getting extra life insurance here.)
4. Take a close look at your debts.
Your debts are a big factor as you shop for life insurance. If you have a large mortgage or student loans and want those bills taken care of should something happen to you, you’ll need a life insurance policy large enough to cover them and replace your income.
5. Consider how your kid’s needs might change.
Your kids may be toddlers or in grade school now, but will their financial needs surge as they age? As you decide how much life insurance to buy, consider the costs of college and whether you’ll help your kids with the expense. When you consider how much college will cost in 2028, you’ll quickly realize a single year or higher education might cost two-to-three times what it costs now.
Also consider how much more expensive it could be to care for your kids when they’re older and more involved in school. Will they play an expensive sport or need to travel for school events? Will you want them to have a car when they get their driver’s license? Would you want to leave behind a lump sum to help them buy their first home? All these factors influence the death benefit you elect to leave behind.