My Wife and I Make $300K+ a Year With Two $1 Million Life Insurance Policies. Is This Too Much Insurance?

For most people, insurance is a reluctant necessity that protects your assets and your family’s financial future.

If you own a car or a house, or if you make significant income, insurance helps you and your family avoid a potential catastrophe. I don’t love giving significant money to insurance companies each month. But I know it’s an important part of taking good care of my finances.

However, I think insurance is one of the most confusing areas of personal finance. You need to figure out what types of policies you need, the best companies for each policy, the coverage amounts and all sorts of minute details.

How much insurance do you need? That’s difficult to answer without knowing your specific circumstances. But it’s also a question that’s worth your time.

Let’s take a look at a specific example that illustrates just how easy it is to be off base with what coverages you do and don’t need, even if you’re smart and organized.

Do My Wife and I Have Too Much Insurance?

My wife and I are paying $400 a month for insurance policies excluding health insurance. That includes two $1 million term life insurance policies. Should I cut back?

That’s what a listener recently asked Clark.

Asked Dylan in Illinois: “Do I have too much insurance? I’m a 33-year-old married homeowner with a newborn. My wife and I have about $1.8 million in assets (including our home equity) and around $680,000 of debt ($660,000 mortgage and $19,000 car loan).

“All of our insurance is through USAA and we currently have the following policies: two $1 million 30-year level term life insurance policies, homeowners insurance, a $1 million umbrella insurance policy, $15,000 personal property insurance for wife’s engagement ring and auto insurance.

“All of these policies cost us around $400 a month. Is this too much insurance? We live in Chicago, earn $300,000 to $400,000 gross income per year and own a two-bedroom townhouse.”

Dylan is following Clark’s advice with level-term life insurance instead of whole life insurance. Term life insurance is designed to protect your family against the loss of your income in the event of your untimely death.

However, even though it sounds like Dylan and his wife are stacking all kinds of insurance, Clark thinks the notion that they have too much insurance isn’t true.

“So Dylan, at your income you actually don’t have enough insurance. $1 million each, level term, is not enough,” Clark says.

“You should have roughly 10 times your annual income. So you are short of insurance quite a bit. You’re young. In the event one of you suffers an untimely death, it’s not enough insurance for the survivor.

“So I would say weirdly you may need more life insurance than what you have now in order for the surviving spouse to live the lifestyle that you currently live.”

How Much Life Insurance Do These New Parents Need?

Let’s say that Dylan and his wife make $400,000 a year together. And that they each make $200,000.

To reflect 10 times earnings, they’d want term life insurance policies of $2 million each. So for that reason, they don’t have too much insurance according to Clark.

Plus, since they have a young child depending on their income, it’s even more important for them to pick the right benefit amount for their term life insurance policies.

“Boy, I buried the lead,” Clark says. “With the newborn, absolutely this is a good time to assess the amount of insurance you have for level-term life insurance.

“Every other insurance you have is fine. And you’re doing great. So yeah, I think that having some more level-term insurance would be the right thing for you to do to protect the surviving spouse and your new bundle of joy.

“And congratulations to you on that. And I hope you’re both getting some sleep these days.”

Final Thoughts

If you have significant assets, an umbrella policy is a great way to protect them.

Still, one of the most challenging things for most people is figuring out what type of life insurance to buy — and how much life insurance benefit you need.

Clark recommends 10 times your salary as a great benefit number when you buy term life insurance.