Ensure You’re Not Over Insured

Can you ever have too much life insurance?  From the recent article I wrote on How Much Life Insurance Do You Need, I discovered that I’m most likely over insured with life insurance.

You might be saying big deal!  How can being over insured really be that bad?  Generally if you’re over insured for something, you’re wasting money on the monthly premiums!  I always assumed that more life insurance was better.  I care about my family and I want the best for them.  Also, life insurance comes pretty cheap when you’re relatively young (less than 35).

In this article, I’ll go over a real life example to show you how you can ensure that you’re not over insured.  Read on to find out how I plan to save $300 / year by properly adjusting our life insurance benefits to properly fit our family’s needs.

 

Ensure You’re Not Over Insured – Personal Example – A Detailed Approach

For detailed approach, I’ll fill out the questions I posed in the previous post How Much Life Insurance Do You Need and total up the results to get a final life insurance coverage amount.  I encourage you to follow along with your own info to see your total!

1. How much do you need for funeral costs (the current average is ~$7,300 for a funeral)
   1. Assume $10,000 for funeral.
2. How much debt do you have that you’d like to cover with your policy (house, car(s), credit cards, student loans, etc.)?
   1. House and wife’s student loans = $277,000.
3. If your spouse is currently not working, will you assume they’ll go back to work?
   1. She’s currently working, assume she would continue.
4. If you’re a US citizen, what amount of what amount of Social Security benefit will your family receive if you die?
   1. If I’ve done the math correctly, the SSA calculator shows that the maximum family payout would be ~$1,500 a month until the kids are 18 if I die now.
5. Considering your answers to questions #2, #3, and #4, what annual expenses will the policy need to cover?
   1. If the house and student loans are paid off by the insurance policy, then the amount of bills I normally cover each month is ~$500 per month or $6,000 a year.  
   2. The Social Security benefit would cover all of this – so the policy will NOT need to cover any additional annual expenses.
6. How many years of expenses will need to be replaced?
   1. In general, I would assume the policy will cover 10 years of expenses with current standard of living.  
   2. Because the Social Security benefit is greater than the monthly expenses, this is not applicable for me.
7. Should your policy include money for any kid’s college tuition?  If so, how much total?
   1. Our current savings should cover the kid’s college at an in-state institution.
8. What amount of savings, retirement savings, college savings, etc. do you already have?
   1. Assume all non-retirement savings goes to kid’s college and my 401k retirement fund would roll into wife’s retirement.
9. Do you need a lump sum payment to keep a family business running in the short term or any other lump sum payments?
   1. Assume lump sum of $15,000 for used car purchase.

Other Assumptions

• I’ll assume that she would remarry at some point as she’s in her early 30s.
• I’ll assume she plans to retire at 55 – should be no issue with current retirement savings rates.
• I want to assume my family will maintain a similar standard of living after I die.

TOTAL = $10,000 + $277,000 + $0 * 10 years + $0 – $0 + $15,000

TOTAL = $302,000.

As you can see, the amount my family would need is GREATLY reduced because our expenses are low enough that the Social Security benefit would cover these monthly expenses, and we already have non-retirement savings that could be used for our kids’ college tuition.  That being the case, for us the term life insurance really only needs to cover funeral expenses, paying off the house and student loans, and include a lump sum payment for another used car.

 

Ensure You’re Not Over Insured – Personal Example – A Simplified Approach

If you’re not a details type of person, then this rule of thumb is for you.  Try this: Funeral expenses + your YEARLY TAKE HOME PAY times 5.  It’s that simple!  Here, take home pay is defined as pay after taxes, 401Ks, life insurance, health insurance, etc. are deducted from your paycheck.  Quite simply, just the amount your paycheck annualized.  For me, this would be:

$10,000 + $56,000 * 5 = $290,000.

So for me, the detailed and simplified approach give just about the same answer.  It is telling me that I should be carrying a life insurance policy right around $300,000.

 

I am Way Over Insured

Yes, I’m over insured.  This is the first time I’ve sat down and actually gone through the numbers specific to our family’s situation.  I’m currently insured for ~$600,000 because I just figured more is always better.  This means I’m current over insured for life insurance by about $300,000!!!

But wait, there’s more!!  I discovered when looking through my work benefits that I’ve been paying a monthly premium for $200,000 life insurance coverage for my wife and accidental death insurance for my wife and kids.  This is something I setup 3-4 years ago and left on autopilot, but it has been sitting there sucking away money from my paycheck twice a month.

All together this means that I’m spending $292.14 a year on additional term life insurance/accidental death insurance that is most likely overkill for our family’s current situation.  I need to look into reducing the amount I’m insured back down to $300,000, review the amount my wife is insured for under her work benefits, and eliminate the accidental child life insurance.  I’ll plan to roll this into a future monthly savings goal for myself.

 

Final Thoughts

If you haven’t gone through and analyzed how much you’re spending on life insurance each year I strongly suggest you take 30-45 minutes to review it.  Following the simple questions I’ve outlined for you here, you can make sure you don’t make some of the same mistakes I have.

You owe it to yourself to ensure you’re properly insured.  If you’re lucky, you could save several hundred dollars a year by ensuring you’re properly covered.  You could also discover that you need more life insurance.  If new dependents have come into your life and you haven’t updated your life insurance policies you could just as easily be under insured which could be even worse!