Everyone has an insurability limit. After you compare life insurance quotes and then apply, the insurance company reviews the coverage you currently have in place, if any, to make sure you aren’t over-insured. Your insurability limit is based on your income and net worth.
Therefore, while you most likely don’t have too much coverage on a technical level, there is a chance you may own too much coverage simply based on your personal needs. This is one reason why performing a term life insurance review every few years and after every big life event is important.
How Much Life Insurance Do I Need?
To answer this question you essentially need to determine how much of an economic value your life has to those who rely on you. There’s no question that emotionally your family needs you, but it would be foolish to not consider how they also financially rely on you. There is a great quote from Dr. Solomon S. Huebner: “He who does not insure gambles with the greatest of all chances and, if he loses, makes those dearest to him pay the forfeit.”
When determining how much term life insurance you need, there are a couple things to consider.
1. Estimate your long-term financial obligations.
How much income will you provide your family until you retire? Often term life insurance is set to protect your family during your peak earning years and then expire when you’re near or at retirement.
Purchasing enough term life insurance coverage to take care of the mortgage and children’s education are likely the largest expenses to consider. Then add in other debt, such as credit card debt and personal loans, and your funeral costs.
2. Subtract your assets.
From your long-term needs total, you can subtract assets such as investments, retirement plans, and survivor’s benefits from Social Security. A surviving spouse and each child will be eligible for SS benefits as long as the children are under 16 and living with the surviving parent. The children’s benefits will continue until they are 18.
You cannot predict when you’ll die, but keep in mind the blackout period for receiving survivor’s benefits. If you have no dependent children age 16 or under, your spouse is not eligible for benefits until age 60. And if your spouse begins to collect benefits before his or her full retirement age (age 66 or 67 depending on the year you were born) they receive a reduced amount.
If you’re looking for a simple way to calculate how much life insurance you need, check out our life insurance needs calculator. Answer three questions and our tool will show you how much life insurance you should consider purchasing. The tool doesn’t take every possible scenario into consideration, but it’s a great place to start.
Do You Have Whole Life Insurance When You Only Need Term?
Whole life insurance is permanent, so the premiums are much higher than term. Whole life insurance also accumulates a cash value that you can access while you are alive.
If you cannot keep up with your whole life insurance payments, and would like term insurance instead, you do have surrender options. You can surrender the whole life policy for cash and buy a new term life insurance policy, or you can purchase paid-up term.
Paid-up term is when you use the whole life insurance policy’s net cash value to buy term coverage—with the same face amount as your whole life policy—in one lump sum so you have no more premiums to worry about. How much net cash value you have determines the term length of the policy.
Jane Smith is 50 years old. She has a $300,000 whole life insurance policy with a cash value of $66,000. Jane surrenders the policy and opts to use the $66,000 to purchase a term policy. The $66,000 will fully pay for $300,000 in coverage for the next 16 years and she won’t have to make any further payments.
It’s worth it to compare life insurance quotes before making a decision. Depending on how long ago you purchased your whole life insurance policy, much may have changed. The premiums for term life insurance may have dropped considerably since then (they are currently at an all-time low) and your health may have changed.
If your health has deteriorated significantly, purchasing the paid-up term coverage is a good option. However, if your health has been stable, or maybe you’re in better health now (perhaps you quit smoking?) then it may be in your favor to surrender the whole life policy for cash and buy a brand new term policy.
See what you’d pay for life insurance
What Type of Life Insurance Do I Need?
Maybe you aren’t even sure whether you need whole or term life insurance. Let’s discuss each so you can make an informed decision.
Term Life Insurance
There are essentially three types of term life insurance: level term life insurance, return of premium term life insurance, and decreasing term life insurance.
Level Term Life Insurance
Level term life insurance is the most common and the type that makes sense for most families. Your premiums are level, in other words, they will never change during the life of the policy. You can choose how much coverage you need, what term length you need it for, and if you want any extra riders added on.
The premiums for term life insurance are quite affordable for most families. It’s temporary coverage, not permanent. If you die while the policy is inforce, or active, your beneficiaries receive the death benefit. If you outlive your term policy, the coverage simply ends unless you convert or renew it.
Jenny Jackson is 35 years old and purchases a $250,000 20-year level term life insurance policy that costs $17 per month.
If Jenny dies anytime within the next 20 years, her beneficiaries receive $250,000. The premium payments are only required while she’s alive. If she dies at the end of year 10, she will have paid approximately $2,040 for a death benefit of $250,000 for her loved ones.
If Jenny is alive after 20 years, her beneficiaries do not receive anything and her coverage ends. She will have paid approximately $4080 total over those 20 years.
Return of Premium (ROP) Term Life Insurance
ROP term life insurance is similar to traditional level term life insurance in almost every way except for the fact that if you outlive your policy, you are refunded the premiums you’ve paid. The premiums for ROP are more expensive compared to traditional level term life insurance.
Jenny Jackson is 35 years old and purchases a $250,000 20-year return of premium term life insurance policy. It costs $50 per month.
If Jenny dies anytime within the next 20 years, her beneficiaries will receive $250,000. The premium payments are only required while she’s alive. If she dies at the end of year 10, she will have paid approximately $6000 for a death benefit of $250,000 for her loved ones.
If Jenny is alive after 20 years, her beneficiaries do not receive anything and her coverage ends. Jenny is, however, refunded all the premiums she’s paid over the years tax-free.
Decreasing Term Life Insurance
Decreasing term life insurance is similar to level term life insurance, but with one big difference. The difference is that instead of offering a locked-in amount of coverage that lasts over the entire term, the coverage decreases in value, but your premiums remain level. This product is usually purchased with a mortgage, but we recommend that you instead buy a traditional term life insurance policy or ladder policies for your varying needs.
» Calculate: Life insurance needs calculator
Whole Life Insurance
Whole life insurance is one type of permanent life insurance, but it’s the most common and least complex of the varying types of permanent products. If you’re interested in reading about other types of permanent products check out this blog: The Types of Permanent Life Insurance.
A whole life insurance policy will last your entire life, regardless of your health, as long as the premiums are paid. Whole life insurance policies also accumulate a cash value you can access during your lifetime and some will also pay out dividends based on the insurance company’s investment successes.
Policyowners have options as to how they can receive policy dividends. Dividends can be (1) received as cash, (2) used to reduce premium payment, (3) used to purchase additional full paid-up life insurance, (4) left in the policy to earn interest on your behalf, (5) used to purchase term life insurance, and (6) used to increase premiums to make the policy fully paid-up at an earlier age than originally planned.
Policyowners can access the cash value by surrendering (or terminating) the policy or through policy loans. Policy loans on life insurance are similar to how you would take out a bank loan except you don’t have a time limit on when to pay it back. You actually don’t have to pay it back at all while you’re alive if you don’t want to, but then the insurance company will take the unpaid loan balance plus interest from your death benefit when you die before your beneficiaries receive it. And just to clarify, you cannot take a loan out on the face amount of your policy, only the accumulated cash value. If your loan amount plus interest ever exceeded the policy’s cash value, the policy would terminate.
Mainly because of the cost, whole life insurance is not for everyone. However, a more affordable route to take would be to consider purchasing a small whole life insurance policy and supplement it with a larger term life insurance policy to protect your family during your earning years.
If you think you need a change in coverage, start by comparing life insurance quotes.
» Compare: Compare life insurance quotes
It also doesn’t hurt to get comfortable with the terminology used in the life insurance world. We wrote a blog breaking down the terms in an understandable way here: Life Insurance Key Terms You Should Know
About the writer
Natasha Cornelius, CLU
Senior Editor and Licensed Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.