You might be surprised to discover that there are limits to how much life insurance you can get. The top life insurance companies put limitations on how much coverage someone can get for various reasons.
What we at IBUSA often run into is, once an individual decides he or she is ready to purchase a life insurance policy, the next question that usually comes up is…
“How much life insurance can I get?”
A question that is often referring to two separate issues.
The first being, how much life insurance SHOULD I get?
And the second being, how much life insurance can I QUALIFY for?
For this reason…
We wanted to take a moment and discuss how to decide how MUCH life insurance you should buy and how an insurance company will determine how much an individual should be ALLOWED to purchase.
Questions that will be addressed in this article will include:
- How do life insurance companies determine how much insurance a person can purchase?
- Why do life insurance companies “limit” how much coverage a person can purchase on themselves?
- What’s the best way to determine how much life insurance I need?
- What can I do to ensure that I buy the “right” life insurance policy for me?
So, without further ado, let’s dive right in!
How do life insurance companies determine how much insurance a person can purchase?
To understand how much life insurance an individual can buy, it’s important to understand that the whole purpose of insurance (any insurance for that matter) is to “indemnify” an individual or compensate for one’s loss or damage.
The phrase: “to make one whole” is often used to describe what indemnify means.
Insurance isn’t designed to make someone rich.
Instead, it is designed to help a family compensate for the financial loss that they would suffer if the insured died prematurely.
So, from a life insurance perspective, it’s all about the numbers.
If you were to die today, how much future income would your family lose and/or what would it take financially to pay someone to “theoretically” replace your lifetime wages!
We understand that this is a very COLD way of looking at things, but at the end of the day, the insurance industry is all about statistics, dollars, and cents.
“Stats, dollars, and cents… and risk management.”
This is why most life insurance companies will follow a rather strict set of rules when it comes time to determine…
“How much life insurance a person can qualify for.”
Each company may have their own rules or guidelines; most tend to use one’s current active income level multiplied by a certain number of years to determine how “much” insurance someone may be able to qualify for.
The “number of years” will be dictated by one’s current age and will usually look something like this:
However, we should note that when an insurance company looks at one’s income to determine how MUCH someone might be able to qualify for, they are only going to look at one’s “active” income or income that would disappear as a result of the insured dying.
Which means that…
If you aren’t currently working now or are retired, and all of your income is passive, you may find it difficult to “financially justify” the amount of insurance you may be requesting.
In cases like these, you will definitely want to make sure that you are working with a true insurance professional who will be able to structure your application in a way that will provide you with the best opportunity for success.
We should also point out that…
Certain “types” of life insurance policies like a no medical exam term life insurance policy or a guaranteed issue final expense insurance policy may have additional limitations on how much coverage can be purchased as well.
Now at this point, you may be asking yourself…
“Why do life insurance companies “limit” how much coverage a person can purchase on themselves?”
“If I can afford the coverage, why shouldn’t I be allowed to purchase it”
This is why we now want to shift gears a bit and focus on why life insurance companies will put limits on how much insurance one can purchase on themselves or another.
Why do life insurance companies “limit” how much coverage a person can purchase on themselves?
The main reason why a life insurance company is going to limit how much life insurance a person can purchase “on” him or herself is that the whole purpose of a life insurance policy is to indemnify the beneficiary or make the beneficiary financially “whole” if the insured dies prematurely.
The insurance’s purpose isn’t to “enrich” one’s beneficiaries with a life insurance death benefit. Instead, the purpose of a life insurance policy is to make sure that they aren’t financially injured or ruined as a result of your premature passing.
That, and a life insurance company never wants to find themselves insuring someone who would be worth more DEAD to a family than alive!
But it’s important…
To understand that just because a life insurance company says that you can qualify for a million-dollar life insurance policy or a ten million dollar life insurance policy doesn’t mean that’s how much life insurance you should buy.
It just means that how much you CAN buy.
The real trick will be to determine just how much insurance you really need to purchase, which is why we now want to take a moment and discuss some of the factors one should consider when trying to determine just how much life insurance they’ll need to properly protect their loved ones.
What’s the best way to determine how much life insurance I need?
For starters, you can use our life insurance calculator to give you an idea of how much life insurance you need.
Your total cost for years of retirement at per year is:
Assuming you retire at age , you have investing years left. Using a annual rate of return for your investments, you're expected to earn a total of .
Now, since there isn’t any “ironclad” approach to determining how much life insurance someone might need to protect their loved ones adequately, we generally like to approach this question by first applying the “Rule of Seven”.
The “Rule of Seven” basically says that the minimum amount of life insurance that one should consider purchasing for a (financially) dependent beneficiary is seven times their annual income.
From there, the insured can then decide whether or not this amount would be adequate to protect his or her loved ones adequately.
For example, let’s take a look at a 58-year-old married man with two college-aged children ages 22 and 24 that is currently earning $85,000 a year.
In this situation, if we looked at the “Rule of Seven,” we would be looking at about $600,000 in insurance needs.
A number that may make sense since both of his children are just about done with college and “technically” should be on their own soon enough. In this situation, $600,000 may be enough coverage.
Let’s look at someone aged 34 with two small children ages 2 and 4 earning $65,000 a year. In this situation, the “Rule of Seven” would suggest that about $450,000 to $500,000 in coverage would be enough.
But let’s now…
Ask ourselves, is seven years of income enough to protect this family financially? Would $500,000 be enough to pay off a mortgage and finance college tuition for two children?
This is why most life insurance companies would allow someone in their early 30s to purchase up to 25 times their annual income!
It’s also why…
The “Rule of Seven” should only be considered a good way to get one “thinking” about how much insurance they need and then make adjustments to this amount based on their individual circumstances. It’s also why we here at IBUSA only like to use the “Rule of Seven” in combination with…
“What do you feel comfortable paying each month?”
This is because at the end of the day if you don’t feel comfortable with your payment, chances are you’re not going to keep your policy “in force” for very long. This means that eventually, your family will be at risk of not having ANY coverage!
This brings us to the last topic that we wanted to discuss here in this article which is…
What can I do to ensure that I buy the “right” life insurance policy for me?
One of the most important things that you can do to increase your chances of finding the “best” life insurance policy for you is to be sure and take your time researching what all of your options are before applying for coverage.
And one of…
The most important “option” you should be researching is “who” you decide to apply with. You see, buying life insurance isn’t like buying a car or a TV; it’s something you need to be able to “qualify” for.
This means that you’re going to need someone’s help navigating through all the different options out there so that when it comes time to applying for coverage, you’re actually applying with the insurance company that is most likely going to provide you with the “best” opportunity for success.
The good news is…
That this is exactly what we here at IBUSA can do for you, you see, because we are an independent life insurance brokerage that can work with dozens of top-rated life insurance companies, we don’t have to rely on a…
“One Size Fits All”
Approach to your needs.
Instead, we can “shop” a variety of different life insurance companies simultaneously and force them to compete for your business!
So, what are you waiting for? Give us a call today and experience the IBUSA difference!