3 Signs You're About to Apply for Too Much Life Insurance

Don't fall into these traps.

Life insurance is something you really shouldn't skimp on. The policy you buy should be designed to protect your loved ones financially in the event of your passing.

But there's also such a thing as buying too much life insurance. And if these signs apply to you, it means you may be at risk of overpaying -- and taking on costlier premiums than necessary for no good reason.

1. You're replacing way more than 10 to 20 times your income

There's no single formula to follow when it comes to deciding how much life insurance to buy. Some experts will tell you to buy enough coverage to replace your salary 10 times over, while others will say that 20 times your salary is a more appropriate target, especially if you're buying a policy with a 20- or 30-year term. But if you're aiming to replace, say, 40 times your salary, you're probably going overboard.

It's one thing to want to leave your loved ones with a nice sum of money in your absence. But if you buy too much life insurance, you might struggle to keep up with your premiums. And at that point, you'll risk having your policy lapse if you can't make those payments.

2. You don't have a lot of debt to pay off

In addition to replacing a certain number of years of income, your life insurance payout should also include money to cover outstanding debts you share jointly with another person, like a mortgage loan. But if you don't have a lot of debt to pay off -- or any debt, for that matter -- then you may not need to pad your coverage so much.

So, let's say you earn $100,000 a year and want enough coverage to replace 10 times your salary plus the balance on your $400,000 mortgage. That means you're looking at a $1.4 million death benefit. But if you only have a $100,000 mortgage, a $1.1 million policy may be just fine.

3. You're looking at premiums you can't afford from the start

Life insurance is something you shouldn't have to struggle to pay for. If that's the case, perhaps you're purchasing too much coverage.

Going back to our example, let's say you earn $100,000 a year and want to replace 20 times your annual salary plus have enough money left over to pay off a $400,000 mortgage. It's not necessarily unreasonable to buy a $2.4 million policy. But if you can't afford the premiums that come with it, it's a sign that you'll need to scale back and secure less coverage -- at least for now.

Life insurance is an essential thing to have, but it shouldn't impede your ability to pay your bills and work toward other financial goals, like saving for retirement and putting your kids through college. If that's the case, then it may be time to reexamine the amount of coverage you're buying -- and go with a lower number.