Are You Paying Too Much for Life Insurance?

Wasting money on life insurance isn't a good financial choice.

Anyone who has people depending on them should consider investing in a life insurance policy. Paying the premiums for life insurance coverage can be well worth it to spare surviving loved ones from financial disaster in case of an untimely death. 

While buying life insurance is a smart financial move, paying too much for it isn't. That's why it's important to know some signs that a policy may cost more than it should. 

1. The life insurance policy is a whole life policy

Whole life policies can cost between five and 15 times what a term life policy costs -- and usually, paying this extra money isn't the best option for most people. 

Whole life policies are expensive because they have an investment component and the policy is in effect indefinitely, so the death benefit will eventually pay out. For most people, having life insurance indefinitely isn't needed because loved ones won't be dependent on them forever. It makes little sense to pay for life insurance to provide a death benefit after the policyholder is retired and no longer earning income or covering costs for dependents. 

Term life policies are much more affordable than whole life coverage. And while the death benefit is paid out only if the policyholder dies during the coverage term, it's possible to choose how long that term is. This means policyholders can get coverage for however long they need it -- usually up to around 30 years or so. 

2. The term of the life insurance policy is too long

A term life policy with a longer coverage term can cost more than a policy that provides coverage for a shorter period of time. If a policyholder only needs coverage for around 10 years or so until dependents are grown and their income is no longer needed, then it wouldn't make sense to pay more for a policy in effect for longer.

It's important to consider the coverage term carefully and make a fully informed choice about how long the insurance will actually be needed. This can help policyholders avoid paying unnecessarily higher premiums. 

3. The death benefit is too large 

Finally, life insurance is more expensive if the death benefit is bigger. And it doesn't make sense to pay a fortune for a life insurance policy that provides a larger payout than necessary.

The purpose of life insurance isn't to make surviving family members wealthy. It's to provide for their needs in case of an untimely death. Usually, the death benefit should be large enough to pay off a mortgage and other debt, replace the deceased's income for as long as needed, and provide for the education of minor children. A policy with a larger death benefit than that would be needlessly expensive.

Essentially, the key is to make sure the right type of life insurance is purchased and that the policy provides the correct amount of coverage. If those two steps are not taken, the life insurance policy ends up being more expensive than it should be, because it offers unnecessary coverage the policyholder is paying for.