Updated March 3, 2021|4 min read
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The most important part of a life insurance policy is the death benefit—this financial safety net for your loved ones is the main benefit of purchasing a policy. Securing sufficient coverage requires not only accounting for the financial support you currently provide but also anticipating future expenses.
While a million-dollar life insurance policy might initially seem like too much life insurance, once you account for the long-term costs of dependent care and any outstanding debts, you may discover you need close to that amount, if not more. Read on to find out if a $1 million life insurance policy is right for you and the average cost at every age.
Purchase life insurance coverage at least 10-15 times your income; if you make $100,000 annually, that’s $1 million
Account for any additional costs your beneficiaries may face, like shared debts, when calculating your coverage needs
There are no restrictions on how your beneficiaries spend a $1 million life insurance death benefit
The cost of life insurance increases 4.5-9% every year you age, so buy earlier to save money if you think you’ll need a million-dollar policy in the future
The best way to determine whether you need a million-dollar policy is to calculate your current expenses and future financial obligations. For example, say you:
Make $100,000 per year
Have $200,000 remaining on your mortgage and
Plan to have a child before your policy expires
Your remaining home loan plus the cost of raising a child (approximately $284,570) would total almost $500,000. To cover your mortgage, childcare expenses, and provide an income replacement equal to just five years of your $100,000 salary, you’d need $1 million in coverage.
Policygenius advisors recommend purchasing coverage that is 10-15 times your income, though this may change with age. If you’re younger, you may want more coverage for future financial obligations, while if you’re closer to retirement, you’ll likely need a lower benefit amount.
The cost of a $1 million policy will depend on your age and what health classification you receive during the underwriting process, as well as how long your coverage lasts.
Your classification depends on your medical history and other risk factors, like smoking habits or violations on your driving record, but buying when you’re younger and healthier is generally a savings advantage. For example, a 25-year-old female might pay $34.44 per month for a 20-year, million-dollar policy, while a 45-year-old female in similar health would pay $84.04.
The table below reflects sample premiums for a million-dollar, 20-year term policy for men and women of different ages in the Preferred Non-smoker health class.
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When the insurer pays the death benefit to your beneficiaries, there are no restrictions on how it’s spent.
Here are some common ways beneficiaries spend the death benefit:
Childcare or dependent care
Monthly bills and everyday expenses
The death benefit is generally paid out in a few ways: as a lump sum, in an annuity, or in a retained asset account.
Receiving the death benefit as a lump sum means you get the entire death benefit after filing the death claim, whereas getting paid out in an annuity means that you receive the death benefit in yearly installments. A retained asset account works like a checking account held by the insurance provider. You use checks to make withdrawals and funds can earn interest until withdrawn.
Depending on the life insurance company and your age, you may not be eligible for a million-dollar policy. When you apply for life insurance, insurers evaluate whether you are purchasing a reasonable amount of coverage based on your individual circumstances.
This is usually based on your income, net worth, general financial stability, and what life insurance coverage you already have. For example, if you’re a graduate student with limited income applying for a $1 million policy, you may only receive an offer of $250,000 with an option to apply for more coverage in the future.
Each provider sets a maximum amount of coverage individuals in each age group can purchase. Here are ranges from Policygenius’ partner insurance companies:
Under age 40: 25-40x yearly income
Age 40-60: 10-25x yearly income
Age 60-70: 5-10x yearly income
Based on these ranges, you’d need to make at least $25,000 under age 40 to qualify for a million-dollar life insurance policy, but $100,000-200,000 to qualify at age 60.
For non-working spouses, providers may only offer you coverage matching that of your working spouse.
Net worth can also impact your insurance offer. If you’re a retiree in your 60s with a high net worth who earns $30,000 in yearly dividends, you may only apply for $300,000 in coverage but receive a greater offer to account for your total assets.
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If you already have some life insurance coverage and apply for another policy, you may receive a policy offer that is lower than the amount for which you applied. For example, if you apply for a $1 million policy, but you already have a $500,000 life insurance policy, the insurance company may come back with an offer of only $500,000.
Each life insurance company approaches coverage maximums differently, so shopping around is the best way to ensure you get the right amount of coverage.
One million dollars can sound like a lot of life insurance, but if you have dependents or debts it may be the minimum amount of coverage you need. If you think a million-dollar life insurance policy fits your financial needs, an independent agent or broker can help you find competitive pricing based on your profile.
Our advisors recommend buying coverage at least 10-15 times your salary, and up to an amount that accounts for any debts or dependents you have. If you make $100,000 per year or have children, a spouse, and a mortgage, your coverage needs could easily total at least $1 million.
The cost of a policy varies based on your age, health, and other risk factors. For a 20-year policy, a healthy nonsmoker might pay approximately $40 per month throughout their 30s, $95 in their 40s, and $245 in their 50s.
Tally up your income, expenses, debts, and any future expenses you anticipate, like a mortgage. A $1 million policy would be too much for a recent college graduate, but a family of five with a mortgage might need even more than $1 million in coverage. It all depends on your individual circumstances.
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