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When you apply for life insurance, you decide how much coverage you think is needed for the death benefit. Even if $1 million sounds like too much, you may have a number of reasons to consider a policy of that size. And it could be more affordable than you might think.
How much does a million-dollar life insurance policy cost? It depends on certain factors. Here are some considerations regarding cost calculation and usefulness — plus when it might make sense to purchase one.
Reasons for Needing a Million-Dollar Life Insurance Policy
A million dollars is far, far more than what's needed to cover a basic funeral and other final expenses. However, a policy this large might well be needed to cover other financial goals far beyond just final expenses.
Some possible reasons include:
- Your family depends on your income. If your spouse and children rely on your income, life insurance could replace that income should you pass away. Think of how much you'd earn over the rest of your career. If you're making $50,000 a year, $1 million replaces 20 years of your earnings, which is likely enough time for your kids to grow up. If you're making $100,000 a year, $1 million only replaces 10 years. In terms of income replacement, $1 million may not even be enough depending on your salary and the length of time you want to provide for your family.
- You'd like to help pay off your mortgage and other debt. Coverage of $1 million could allow your family to pay off your home loan. If you have any outstanding car loans, credit card charges, student loans or other debt, the policy would give your family money to help wipe them out as well.
- You'd like to help cover college tuition for your children. For the 2022-23 academic year, in-state tuition and fees at a public university cost an average of $10,423.1 Meanwhile, a private university averaged $39,723. Those numbers don't include room and board and will likely continue to climb over time. With $1 million in coverage, you could help your kids and other family members pay for their education.
- You want to create an inheritance or legacy. Whether you leave extra money to your young family members, your spouse or your favorite charitable cause, $1 million can help provide them financial support after you're gone.
Do I Need $1 Million of Coverage?
The amount of life insurance coverage you need depends on your own personal financial situation. One common guideline suggests having between seven and 10 years of your income in life insurance. By this rule, $1 million in coverage makes sense if you earn between $100,000 to about $140,000 a year.
You can dive deeper into your financial situation to fine-tune the amount you need. Factors to consider are your family size, the amount you have in other savings, your age, your salary and your expected future income growth. Also consider the costs you want to address with life insurance: your mortgage, college tuition, etc.
You can use a life insurance calculator to get an initial idea of how much coverage you might need based on these factors. You may also want to meet with a financial professional to help determine if a $1 million policy seems right for you.
Factors in the Price of a Million-Dollar Life Insurance Policy
The cost of a million-dollar life insurance policy depends on a number of your individual characteristics. There isn't just a flat rate for a $1 million policy. When you apply for a policy, insurance companies will set your premium by considering factors such as:
- Your age. You often pay more as you get older.
- Your health. Applicants in good health usually pay less.
- Your gender. Women generally pay less than men because they have a longer life expectancy.
- Whether you smoke. Smokers tend to have to pay more than non-smokers because they have a shorter life expectancy.
- Your job and interests. Prices may go up if you have a dangerous occupation or risky hobbies.
- Policy type. The kind of insurance you choose, such as term or whole life, will make a difference.
$1 Million Term Life Insurance Policy Cost
Term life insurance is temporary life insurance. These policies have a set expiration date. A five-year term lasts five years. If you die during the period, your beneficiaries receive the death benefit. If you outlive the term, your coverage expires, and there is no payout.
Term life is typically less expensive than other types of life insurance. For a $1 million policy, the cost will depend on the factors mentioned above. It will also depend on the length of the term. Longer terms are more expensive because they cover more time — a 30-year contract would be more expensive than a five-year one.
$1 Million Whole Life Insurance Policy Cost
Whole life insurance is permanent coverage. It doesn't have an expiration date and can last your whole life as long as you continue paying the premiums. These policies are considerably more expensive than term life insurance, but once you sign up, the premium doesn't go up.
Benefits of a Million Dollars in Life Insurance Protection
A $1 million policy death benefit payout could help you address numerous financial goals, such as replacing your income, paying off your mortgage and debt, and providing college tuition for family members. A smaller policy might not be enough to cover all these goals.
Even if you don't need this much coverage now, securing a $1 million policy can help you prepare for the future. By buying a larger policy now, you wouldn't have to worry about qualifying for more coverage later, which isn't guaranteed. If you buy a $1 million term life policy, it may allow you to convert your coverage to permanent. This lets you switch the policy to whole life without taking a medical exam. Though it is important to keep in mind that increases in coverage are subject to new underwriting.
To get the exact pricing for how much $1 million of coverage would cost for you, you'd need to apply for a life insurance quote. You may want to consider meeting with a financial professional who can help you determine your unique needs and quote you an estimated cost for your coverage.
Sources
- See the average college tuition in 2022-2023. https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic.
