If your family would be better off with you dead instead of alive, you have too much life cover. Financial underwriting assists underwriters in ensuring that life insurance applicants do not have more coverage than they need. It ascertains that your life insurance cover should not be higher than a stipulated percentage of your future economic value. The future economic value is a figure that represents your future earnings until retirement (or up to a certain age if you don’t plan to retire).
There are many ways of calculating one’s life insurance need. With most of the calculation methods, the majority of persons appear to be under-insured. However, being over-insured means a lot more than having too much insurance. You can determine what “enough life insurance” might be by paying attention to the context of financial planning. Based on this, there are a few indicators of over-insurance.
1. Inability to afford other essential protection products
Everyone must have certain things in place when constructing a proper financial plan. Suppose that a person cannot afford to pay for enough medical insurance or save towards an emergency fund. In some cases, it would be the result of debt or otherwise poor financial management. In other cases, this will result from over-emphasis on life insurance, perhaps because of some greedy agent who specialises in life insurance sales.
2. Your life insurance premiums account for more than 10% of your income
In the same way that you have a debt ratio, you should have a life insurance ratio. If you earn $5000.00 a month, a premium near or above $500.00 may indicate unnecessary life cover. This might be a weak method of gauging over-insurance. However, if one recognizes that the sum assured maps directly to the premium, then a burdensome premium may be a symptom instead of a sign of being over-insured.
3. Your aggregate sum insured can provide more than 75% of your current income with a 6% return.
Your Income Replacement Fund should be a key factor in your total coverage. If you work for $80,000.00 per year and you have $1,600,000.00 in life cover, you may be over-insured. The basis is that the annual interest accrued on the life insurance proceeds (after immediate expenses and short-term expenses are deducted) could easily be above 75% of your income. This suggests that your life-insurance needs are more income-based than expense-based and that you are over-insured.
4. A conservative life insurance needs estimate (that is inflation-indexed and expense-based) shows that you need less life insurance.
Doing a conservative life insurance needs estimation (using a replacement ratio of 50%), even while catering for inflation can reveal that persons have more life protection than they need. If they base their coverage level on income, they are ignoring the reality of actual expenses. Factoring inflation ensures that persons do not under-estimate life cover, making it a sound way of anticipating the future value of their coverage needs.
There is the view that one can never have too much life insurance. This is absolute poppycock. Once you estimate your life insurance needs properly, you will have a safe idea of what good life cover is by anticipating future needs and inflation. Including an expense-based life insurance needs estimation can go a long way in avoiding over-insurance.
Over-insurance is arguably just as sinister as under-insurance. Life insurance is like salt. You need enough of it in your dinner for taste. If there is too much, you will spoil the taste that you are striving for. Do not spoil your financial plan either. You may have to use combination of the signs and symptoms highlighted above to determine if you are over-insured. In any event, it will be worth it.