You’ve decided it’s time to buy life insurance. It’s a smart decision. You are protecting your loved ones in the wake of your passing. Before you go and apply for the highest policy possible, you should know that there are limits to the amount of life insurance you can buy.
The Point of Life Insurance
The point of life insurance is to help your loved ones continue the life they are used to despite the loss of your income. It’s not to help your loved ones live a more lavish life than they are used to though. This is why there are limits in place.
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Insurance companies need to make sure that the insurance you purchase makes sense for your situation. For example, if you buy life insurance for your child, you won’t need a million dollar policy or any amount close to it. But if you buy a policy for your spouse, who is the breadwinner in the family, a million dollar plus policy may be feasible.
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What Do Life Insurance Companies Consider?
Every life insurance company has their own requirements regarding how much life insurance you can buy. A few of the most common factors they consider include:
- Your age – Typically, the younger or older you are at the time of application, the less the insurance company may be willing to offer. It’s common for middle-age families to need extensive coverage since they often have a mortgage, miscellaneous debts, children to raise, and other expenses to cover. The older you get, though, the fewer debts (you should have) and the less money your family will need to survive.
- Your income –Each insurance company often has a maximum multiplier they will allow. In other words, let’s say you make $50,000 per year and the insurance company allows you to buy as much as 20x your income in insurance coverage. This means the maximum insurance you could purchase would be $1 million.
- Your debts – If you have large debts, such as a mortgage, an insurance company may take that into consideration. If your goal is to have your family be able to pay off the mortgage in order to live comfortably, the insurance company may increase your personal maximum enough to cover the mortgage too.
- Your reasons – Finally, insurance companies will need to know the reason you need a specific amount of insurance. Is it to cover surviving family members? Do you have a business you have to pass on or do your final wishes include the desire to give to charity? The insurance company will consider these reasons when determining your maximum coverage.
What Do you Qualify to Receive?
Finally, insurance companies will have to put you through their underwriting process to determine if you qualify for the amount you need.
Qualifying for life insurance is based on your lifestyle and your health. Most policies require you to undergo a medical exam that will determine if you are a good risk or not. In other words, insurance companies want to know how likely it is that they will have to pay out on your insurance in the term you’ve chosen. If you are ill or live a high-risk lifestyle, the risk the insurance company takes is much higher than if you weren’t ill or lived a safe lifestyle.
As you can see, there are many factors that determine how much life insurance you can obtain. It’s more than about how much coverage you want – it’s about the coverage the insurance company feels is safe and even necessary for you.
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