How Much Life Insurance Can I Buy?

I love singing funny songs like “If I Had a Million Dollars” with my kids. Little do they know, we do have a life insurance policy for $1 million — yet I’d much rather have our family’s health! But why stop at $1 million? Could the song (and my family’s financial protection) be better “If I Had $2 Million, or $5 Million”?

Finding the right coverage amount to help protect your family doesn’t always translate to going for the absolute maximum coverage a company offers. In some cases, you may not even qualify for the highest-possible policy. Here’s how life insurance companies set limits on what to offer you, and when it can make sense to choose less.

What Is Life Insurance Face Value?

A life insurance policy’s face value is the amount of coverage you’re insured for. This is the amount your beneficiary would receive if you were to pass away.

Whole life insurance policies have both a death benefit (face value) and a cash value component. The cash value comes from a portion of your premium payments and can accumulate over time. You may be able to access cash value via withdrawals and loans. Withdrawals may be subject to charges, and withdrawals of taxable amounts are subject to income tax. If you take withdrawals before age 591⁄2, you may also be subject to a 10% IRS penalty. For loans, there may be interest and income tax liabilities, and taking a loan may reduce the account value and death benefit, which may ultimately cause the policy to lapse. Term life insurance only has a death benefit, no cash value.

Some insurance companies offer policies that go to $1 million or higher. Fabric by Gerber Life offers policy options up to $5 million in coverage, and some life insurance companies go even higher. The Guiness World Record for highest life insurance policy is held by an individual with a $250 million policy from a life insurance provider in Hong Kong.

Before you take the leap to try to supersize your life insurance policy, though, there’s another number you should know — the value of your life.

What Is Human Life Value?

There’s no replacing what a person means to their loved ones, so it can feel strange to imagine calculating what a person is “worth.” Life insurance providers calculate human life value (HLV), but that doesn’t mean defining the intrinsic value of a human being.

When you accept an employer’s offer as fair pay for an hour’s (or a year’s) work, this is one way of putting value on your time. HLV, as a life insurance company defines it, has to do with estimating the financial loss your family would face if you were to pass away. Your earned income is one major part of how life insurance companies calculate your HLV. The labor and money you save for your loved ones is another. That’s why insurance companies don’t calculate a stay-at-home parent’s HLV at $0 because they don’t earn a paycheck. Insurers take into account the various tasks and services the person contributes to the family’s well-being and bottom line.

Insurance companies use your HLV to justify what kind of coverage options are available for you. A life insurance company may set a cap for your application that’s lower than the highest face value they offer, even if you were willing to pay higher premiums for the larger policy. They would do this if they decide that such a high level of coverage isn’t a reasonable fit for your human life value. This can help keep the insurance company’s risk in check and help ensure the company’s finances are strong enough to serve all policyholders.

How Much Coverage Will a Life Insurance Company Approve?

Your maximum life insurance face value depends on factors like your age and income. Companies set caps for how much coverage they will sell a particular individual. These limits vary by company.

Here’s a sense of what policy caps might look like based on income level, in a hypothetical example of a company with potential coverage maximums of 10 times, 20 times or 25 times an applicant’s income. As you can see, we’ve just multiplied these numbers out to give you a rough sense of what this might look like.

Should I Buy the Maximum Policy?

You’re most likely buying life insurance in order to financially help out your loved ones if they were to lose you. So more financial protection is better, right? If you could leave your loved ones $1 million or more, should you take the maximum option?

Not necessarily. While it’s important to buy enough coverage, it’s also possible to over-insure yourself, which can be unhelpful or even harmful to your financial well-being.

A good way to calculate how much life insurance you need is to add up your debts, the cost of future priorities (e.g., your intended college contributions for your kids), your final expenses and some of the living expenses your income would otherwise cover. Some experts recommend 10 times your income as a good guiding sense of your overall coverage needs.

Downsides of having too much insurance can include:

• Coverage that doesn’t fit your life: Say you live well within your means. The maximum policy you could buy may be way more than your loved ones need to maintain a similar lifestyle and pay for what you actually value.

• “Coverage clutter”: If you have duplicate policies or policies offering redundant coverage, you’re taking on more paperwork, premium expenses and time spent managing finances, without meaningful additional benefits.

• Financial strain: Higher coverage means more expensive premiums. It doesn’t make sense to go after the maximum possible coverage you qualify for if that means struggling to afford your premiums in the here and now. You want to make sure you have enough money reserved for your life, not just life insurance.

Having enough life insurance coverage can help you plan to leave loved ones with a helpful benefit. An excessively high policy isn’t necessarily a better option, especially if it would be difficult to afford premiums. A life insurance company sets your maximum based on your income, age and what risk they’re willing to take on as a company. It’s up to you to determine your own family’s needs and priorities and make decisions that serve you best.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.