How Much Life Insurance Can I Buy?
Most of us don’t need to buy as much life insurance as we can actually qualify to purchase.
Term life insurance coverage is designed primarily to replace a person’s annual income if they should die unexpectedly. Replacing your income will help your family remain financially secure and be able to maintain their standard of living should you pass away.
You don’t want to die and leave your family with the financial stress of paying your final expenses without the benefit of your income. This is why term life insurance is seen as a form of "Income Replacement".
Life insurance can also help pay off large financial debts, including a home mortgage loan, student loan, auto loan, and personal loans.
However, some individuals may need large life insurance policies to cover greater financial needs; such as, to keep a business alive, providing a charitable gift, or helping to divide up a large estate among the family and offset substantial estate taxes. This is when it’s important to understand your life insurance limits – the maximum amount of coverage you may be able to purchase.
Life insurance can be easy to purchase. But individuals looking for larger-than-average amounts of insurance coverage may experience some hurdles when it comes time for their policy to be underwritten for approval.
When an individual is asking for 30 times their annual income as the face amount of a life insurance policy, the insurance company will likely ask "Why do you need this much life insurance protection?"
Financial Justification
Insurance carriers require a financial justification for large policies because life insurance is intended to replace wealth, not increase your family’s overall wealth.
Similar to auto insurance, which you can only cover the value of a car and no more, a life insurance policy can only cover up to the maximum value of the person being insured for their life.
A person’s Insurability Limit is the maximum total amount of life insurance that can be In-force on a person at any given time including all of life insurance policies that insure that specific person’s life. Yes, you may own more than one life insurance policy.
For example, if a person’s insurability limit was at $750,000, and they already had an In-force policy for $500,000, another insurance carrier would likely not issue more than a $250,000 policy on top of the existing life insurance coverage without any changes in coverage, or surrender of the existing life policy.
When determining the maximum amount of coverage you may be able to purchase, the insurance carrier takes into consideration your current annual income, net worth, and any other assets or income streams you have access to in order to determine the maximum amount of coverage they’re willing to insure you for.
Life Insurance Limits – Rule of Thumb
For individuals who are married or have dependent children, you may need up to 35 times your annual income to protect your financial obligations to your family, and life insurers understand that need for so much insurance protection.
For example, if you’re a 35-year-old making $100,000 annually, your maximum insurability limit is around $3.50 million.
The general insurance rule for most people is that if you are age 40 or under, your life can be insured for up to 25 times your current annual income.
Every ten years after you reach age 40, that multiplier is reduced by a factor of 5. That means that from ages 41-50, you can get 20 times your annual income in life insurance coverage, 15 times your income from age 51 to 60, 10 times your annual income from age 61 to 70, and 5 times your income from age 71 to 80.
Maximum Life Insurability Limits for Stay-at-Home Parents
Even people that don’t have a source of income, like a stay-at-home Mom can get life insurance since their work at home takes the place of a number of different things they do each day from home for the family, which may cost quite a bit to pay someone to do, should Mom pass away unexpectedly.
Life insurers each have individual rules regarding the maximum amount of coverage they can offer to non-working parents. This amount may vary from half of their spouse’s coverage limit, all the way up to a matching life insurance policy at around $3 million.
However, for most people, the question is "how much life insurance do I really need?"
Assessing Your Life Insurance Needs
When determining how much life insurance you should buy, make sure to use a life insurance needs calculator to assist you in figuring out how much life insurance you really need. It’s quick and easy, and it will help you feel better about deciding how much protection you need to adequately provide for the future financial security of your family.
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