Why You Shouldn’t Overpay for Life Insurance

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Picture of Jake Tamarkin, MBA

Jake Tamarkin, MBA

Jake is a nationally-licensed insurance agent with a Masters in Business Administration and CEO of Everyday Life. His expertise has been featured in: Investopedia, Life Insurers Council, Insurance Thought Leadership, Life-Annuity Agent, and Insurtech Insights.

Some insurance companies would have you believe that “bigger is better” when it comes to buying a life insurance policy.

But overpaying for life insurance can mean sacrificing your life’s ambitions. When you buy more than you need, there’s less money left to put toward your other financial goals. 

The first step in choosing the right life insurance policy is to determine how much insurance you actually need. It may sound obvious, but most insurance companies and agents begin the conversation with information relating to products and policy features.

Since life insurance is one piece of your overall financial plan, it is critical to make sure you aren’t paying for more insurance than you need. After all, life is about finding a balance. To create a solid financial future, you shouldn’t overspend on life insurance or buy a bigger life insurance policy than you need.

Table of Contents

What Life Insurance Companies Don’t Tell You

Most life insurance companies try to sell you more life insurance than you need. But overpaying for life insurance leaves you with less cash to put toward your other financial goals.

Part of being an adult is realizing that a fairy godmother isn’t going to show up and make all of your financial dreams come true.

Because you don’t have an infinite supply of money, it’s up to you to find balance. The trouble is that finding and maintaining that balance is often easier said than done.

You might have heard the saying “the bigger, the better.” While that might be true for ice cream, bigger is not always better when it comes to life insurance. 

Your supply of money is limited, and your priorities determine how you spend it. So, how do you decide how much you should spend on a policy?

The answer is different for everyone. There isn’t a single “best” way to spend  money, just like there isn’t a one-size-fits-all cost of life insurance

3 Things That Drive Financial Balance

The key to not overpaying for insurance is balance. But to find balance, you must examine your decisions about money.

Your financial decisions can be separated into three financial “buckets,” or categories:

  1. Current spending
  2. Future spending
  3. Protection

Your current spending is everything you spend your money on right now. That includes your mortgage or rent payment, utilities, cell phone bills, clothing, entertainment, and other lifestyle expenses.

Any cash you set aside for financial goals is future spending. If you’re saving for a down payment on a new home or your kids’ college, that’s future spending. 

The last category is protection, such as the amount you spend on life, auto, and health insurance.

How you divide your cash between those three buckets determines your standard of living.

But here’s the problem: The more cash you put toward current spending, the less you’ll have available to reach your financial goals.

And if you put too much toward the cost of a life insurance policy, you won’t have the cash available to maintain your standard of living.

Why You Might Need Less Life Insurance Than You Think

Life insurance provides for your loved ones if the worst should happen. If you have someone who relies on your income, consider purchasing a term life policy. 

You want your family to continue their comfortable lifestyle after you’re gone. But your premiums shouldn’t break the bank, either.

When figuring out how much life insurance to buy, there are a few things to keep in mind.

1. Don’t Worry About Taxes

They say the only certainties in life are death and taxes. But that isn’t always true. Unlike your salary, the death benefit from life insurance isn’t usually taxable.

Here’s what the IRS says about life insurance proceeds:

“Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren’t includable in gross income and you don’t have to report them.”

Since taxes don’t necessarily apply, you don’t need to increase your death benefit to cover that cost.

2. Consider Your Direct Expenses

One factor in how much life insurance you buy depends on your income. But replacing your entire salary isn’t always necessary.

Think about it: If you make $57,000 a year, some of your earnings go toward your food, clothing and gas money. 

After you pass away, your direct expenses disappear. Your policy doesn’t need to cover your full salary of $57,000 because your family won’t have those types of expenses anymore.

More good news: while this used to be hard to calculate, The Ultimate Life Insurance Calculator does the math for you! Answer a few basic questions and in the background our algorithm looks at Census Bureau and IRS data to estimate how much it will take to maintain the same standard of living for your loved ones that your income is providing today.

3. Forget About Your Mortgage and College Costs

Most life insurance advice tells you to get enough life insurance to replace your income and cover major expenses like your mortgage or your kids’ college tuition.

But you end up paying a lot more than you should for life insurance that way. Here’s why it doesn’t make sense:

Your current salary should already be enough for your mortgage payment and college savings for your kids. If you increase your policy proceeds so it pays off your mortgage and covers college tuition on top of already replacing your income, you’re being redundant.

Essentially, you’re buying twice as much insurance as you need. And that means you’re likely paying twice as much, too.

Stop Overpaying for Life Insurance

Overpaying for life insurance can mean sacrificing your life’s ambitions. When you buy more than you need, there’s less money left to put toward your other financial goals. 

Your ability to purchase your dream home might be delayed, you might not take that trip to Paris you’ve always wanted, or you may never have enough seed money to start the business you’ve been thinking about. 

The team at Everyday Life understands that life is about balance. We believe you shouldn’t sacrifice your current or future lifestyle to cover life insurance premiums or buy a policy that’s more than you need.  

That’s why we’re making life insurance easier to understand and more affordable than ever before.

Get a free quote to find out how you can afford life insurance without sacrificing your other goals.

Disclaimer: The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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