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How Much Life Insurance Can You Have? There is a Limit!

by Scott G on July 30, 2013

How Much Life Insurance Can You Buy? There is a Limit

There is a Cap On The Total Amount of Life Insurance You Can Have in 2016

Many people are surprised when they learn there is a cap on the amount of life insurance any one person can own 2016.  There is a common thought that you can purchase as much life insurance as you would like as long as you can pay the premiums.  This is not the case.  It’s called financial underwriting.  The purpose of any insurance policy is to provide coverage to an insured in the event of a specified loss.  Insurance is meant to replace what you have lost and to make whole. All insurances are meant to restore you or the beneficiary to the same financial position you were in prior to the loss.  Insurance is not intended for someone to profit from the loss.  Life insurance is not meant to be a lottery ticket; it’s a financial contract that is intended to replace the insured’s earning potential if they had not prematurely passed away.

How Does the Insurance Company Determine This?

Almost every major life insurance company will use what is called a Multiple of Income Factor as part of their underwriting process to determine the total maximum amount of life insurance one can purchase.  Every company has their own financial underwriting guidelines but the sample table below is a good barometer of the maximum amount of life insurance most companies will offer.

Personal Life Insurance Income replacement

Current income multiplication factors for determining the maximum amounts of insurance in force and applied for in all companies for the insured.

AGES                           EARNED INCOME MULTIPLIER

20 – 40                            Up to 30 x insured’s annual income

41 – 45                            Up to 25 x insured’s annual income

46 – 55                            Up to 20 x insured’s annual income

56 – 60                            Up to 15 x insured’s annual income

61 – 70                            Up to 5 -10 x insured’s annual income

>71                                  Up to 5 x or case-by-case determination


An Example of How Much Life Insurance You Can Have

Using the chart above, if you are 45 years old and you make $50,000 a year gross income,  the total amount of individual life insurance you are allowed to have in force is $1,250,000

Wrap Up

Many life insurance shoppers are surprised when they hear that life insurance companies cap the total amount of life insurance any one person can have.  This is to prevent fraud and to follow the principle of what insurance is for- to indemnify– to make one whole prior to the loss.  Life insurance is not meant to be a financial windfall or a lottery ticket.  It is meant to replace the income one would have earned if they had not passed away prematurely.

There are some exceptions to the multiple of income table, mainly estate planning in which the total assets and net worth may allow for the company to approve a greater amount of coverage . 

Have any questions on how much life insurance you are allowed to have?  Leave a comment below.

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