Is it Possible to be Over-Insured?


That sounds like an insane question to ask on a life insurance site, doesn’t it? But a life insurance site – a responsible one at any rate – is the exact the place it needs to be discussed. Any competent life insurance agent will and should avoid putting you in a position to be over-insured.

What are some reasons you don’t want to be over-insured?

You’ll be paying too much for insurance expense

The most obvious reason is that you will be paying too much for life insurance costs. Your budget is made up of a large number of expenses, and you want to make sure that each of them is as low as possible without compromising the necessary products or services that they deliver. It’s no different with life insurance.

There may be the question, how can anyone possibly be over-insured – after all, isn’t too much insurance better than not enough? Generally speaking, you are better off having a little bit more insurance than you need, but that has limits too.

You could be “worth more dead than alive”

You should never want to put yourself into a position where you’ll be worth more dead than alive, and that is exactly what can happen if you have too much life insurance.

If you earn $50,000 per year, but you’re maintaining $2 million worth of life insurance, you have coverage that is out of all proportion to the standard of living to which your family is accustomed. With $2 million, your family will be able to withdraw $100,000 per year – twice your current income – and with earnings on the remaining principal, they may never go broke.

We’re not going to go too deeply the into the possibilities here, but suffice it to say that you should never create what amounts to a financial incentive in favor of your demise.

And that could open up an investigation

On a more practical level, insurance companies do sometimes open investigations when the circumstances surrounding someone’s death look suspicious. Having $2 million worth of life insurance – when you only earn $50,000 per year – can create such a scenario.

Let’s say that you take a $2 million policy, and you die one year later. Given the amount of insurance in relation to your income, and the unfortunate timing of your passing, the insurance company may have reason to suspect that something isn’t right.

That may cause them to dig deeply into the health portion of your policy application. They may decide to open a full investigation to determine the complete scope of your health, under the suspicion that there may have been undisclosed health issues.

Even if there are no findings – because there never was any foul play at all – the insurance company may still withhold the insurance proceeds for a year or more after your death while they conduct the investigation.

This will be especially problematic for your family, since the greatest need for life insurance proceeds will be immediately after your death. Sure, it will all settle in their favor ultimately, but the time in between will be beyond difficult for them.

You need insurance for death, but you also need investments for life

We all need to make provisions for our loved ones in the event of our death, but that should never be at the expense of providing for our lives. Statistically, you’re much more likely to live out your full life than to die prematurely. You will also need to provide for that!

That will mean building and growing savings and investments. Those are the financial products that will carry you through your life – and keep you from being a burden to your loved ones while you are alive. They should consume by far the larger amount of your financial resources.

You should have no less – but also no more – life insurance than you absolutely need.