As morbid as it sounds, if something happened to you and your family needed to face a future without you, your life insurance policy can be your financial protection. In most cases, your life insurance coverage may need to be at least five to ten times your annual salary. This is to help make sure your family can survive the next five to ten years without you.
And if you don’t make that much money, but you have debt or other financial obligations, you might actually need a million-dollar policy (or more).
However, with life insurance, “more is better” is not always the right mindset. A million-dollar policy can be expensive, and you might not know if you even need it.
It's all about the right balance: too little insurance coverage can leave your family underinsured, but too much coverage might make you allocate too much of your budget to your insurance.
A million dollars might seem extravagant, so you might be wondering: Do you need a million-dollar life insurance policy?
If you want to help ensure that your family is covered after you die, it might be the best choice. So in this article, I’m going to unpack this a bit more so you can determine if this much coverage is actually needed or not.
What is a Million-Dollar Life Insurance Policy?
A $1 million life insurance policy works just like one of lesser value. It’s a contract with a face value of $1 million made in exchange with your insurer.
You pay your regular fees, typically monthly. In exchange, your insurer agrees to provide payment to your beneficiaries if you pass away. This monetary amount is tax-free and comes as a lump sum.
If you die while the contract is still in effect, your beneficiary (or beneficiaries) can receive $1 million. When applying for your policy, you get to select who your beneficiaries are. Often, you’ll see a spouse, children, or parents as beneficiaries (or some combination of the three). However, it’s up to you to choose who you’d like to receive your benefits when you pass away.
When purchasing a large policy like this one, it's essential to talk with your tax advisor or a financial expert to understand all the financial details.
The Cost of a Million Dollar Life Insurance Policy
Like any other form of insurance, a life insurance policy considers several variables. The first of these is the type.
There are two main types of life insurance you can choose:
- Term - This can be the most affordable insurance because it covers death benefits only. This can vary from one year to 30 years or more. Premiums for this type are fixed, can some policies are renewable. Most insurers will allow you to convert to a more permanent form of insurance if you want to, such as whole life insurance.
- Permanent - Comes in three types: Whole, Universal, and Variable. There are several options regarding these policies, and it all depends on the insurer, so contact your insurer and review policies carefully to know what you’re purchasing. These can be more expensive than the term life insurance because they are lifetime coverage--you are not only getting death benefits, but they can also have a cash value accumulation feature.
Other factors go into creating your unique quote, and sometimes insurers use complex algorithms to determine what your premiums will be. Here are some of those factors and why they matter when calculating life insurance costs.
Age and Health
Older adults tend to pay more for new life insurance because, unfortunately, they are likely to die sooner. Premiums are based on the likelihood of you paying your policy's claim so younger adults get lower rates because they will (likely) be paying it for a longer period of time.
For the same reason, your overall health is considered. Life insurance applicants with pre-existing conditions and other conditions that could shorten their lifespan will likely pay more, since they have a greater likelihood of making a claim.
For more expensive policies, such as a million-dollar one, your age is even more important. Say you're 35 years old, and you want to purchase a 30-year policy. The insurer may not offer the same term to someone 60 years old because they're more likely to pass away before the term is over.
Lifestyle and Occupation
Your lifestyle also plays a big part in your policy, too, regardless of whether it's for $1 million or less. Underwriters will determine the level of risk that your life insurance policy presents.
In applying for life insurance, underwriters will look at how old you are, as well as your health, lifestyle, and occupation.
Those in more dangerous or physically demanding professions (diving, particular construction work, firefighting, etc.) might pay more. This is because the odds of dying on the job are greater.
Underwriters consider your hobbies as well. If your hobbies include chess and computer coding, you probably don’t pose much of a threat. However, if your hobbies include skydiving, your underwriter might consider those and raise your premiums, deny coverage, or offer coverage with an exclusion.
Smoking also increases your premiums, so it's advisable to quit before you purchase coverage.
Family medical history also affects your rates. If your immediate family, such as a parent or sibling, has suffered a serious medical condition, your rates may be higher. This is simply because there's a greater chance that you'll fall victim to the same medical condition.
To clarify, the insurance company won't care if your mom fell down the stairs when you were eight and broke her foot. It will care if she has a history of diabetes or ovarian cancer. It won't care if your brother got into a fight with a lawnmower and lost his index finger, but it'll care if he's prone to seizures or has epilepsy.
Underwriters calculate how long they expect you to live by analyzing your lifestyle and medical history to determine the risk in offering you life insurance.
It's important to always be honest when filling out your life insurance application. If it comes out you didn't disclose medical conditions or information about your profession, it might be considered a breach of contract, and your beneficiaries may not receive their payout. Be honest, so your loved ones get the benefits you want them to receive.
So Do You Need a Million Dollar Life Insurance Policy?
To answer the original question, you’ll need to look at every aspect of your finances and lifestyle. Your exact coverage should depend on several factors that I’ve already listed, plus things such as:
- Dependents' education and other plans
- Financial obligations such as debts
- End-of-life and funeral expenses
- Family's day-to-day living expenses
- Future goals and aspirations such as homeownership or charitable giving
After considering everything, you may realize you don't need a million-dollar life insurance policy. If you don't earn six figures, have no children, and have no financial obligations, a $500,000 policy might be the right amount for you without emptying your pockets each month.
But certain markers can identify if you need up to a million-dollar life insurance policy. These include things such as:
- If you earn a high salary, at least $90-100k+
- If you live an expensive lifestyle, you'd like to maintain for your family
- If you have a desire to leave a large inheritance for your children and family
- If you face an estate tax and need high liquidity
- If you own or are a partner in a small business
If you have these markers, you might want to consider a life insurance policy for $1 million or more.
One thing to consider that most people don't think of is philanthropy. Most charitable individuals want to donate to a cause of their choice, but don't do so in their lifetime for various reasons.
If you have a million-dollar life insurance policy, you can also have a charity be the beneficiary of your policy -- which actually provides a tax break to your estate.
You can allocate a predetermined amount for your charity, or you can administer the entire amount to the charity of your choice.
Overall, I'd say you need to consider every facet of your lifestyle to determine if you require a million-dollar life insurance policy.
In addition, make sure to consider the following:
- Life Plans
When you consider these factors, you'll be well on your way to figuring out the best life insurance policy for you.
Where to Shop for a Policy
Best 1 Million Dollar Life Insurance Policy
Haven Life is an online life insurance provider that offers term life insurance. Haven was one of the first life insurers to operate solely online. Their primary focus is to provide a high level of quality at an affordable price. Compared to some others on this list, Haven’s application takes a bit longer. However, it tends to be worth it since we’ve seen that they offer some of the lowest prices possible - especially for a provider that does not require a medical exam.
Haven Life offers policies up to $3 million if you’re at or under 59 years old. If you’re between 60 and 64, you may still qualify for up to a $1 million policy, but coverage amounts will vary based on various factors. Check out our full review of Haven Life for more information.
Bestow is another online-only life insurance agent. They offer term life insurance with coverage amounts as low as $50,000 and as high as $1 million. You can find terms of 10 and 20 years.
You can do the application entirely online and have a quote within minutes. What’s even better is that you won’t have to do a medical exam since Bestow uses AI algorithms to determine your rates. So if you’re approved, you’ll not only get a quote in minutes, but you’ll also have life insurance set up within a matter of minutes, too. Make sure to read our complete review of Bestow for more information.
Policygenius is an insurance aggregator that allows you to do a single application and get quotes from various life insurance providers. Their online application is easy to get started - you just answer some health-oriented questions and provide some basic information like your name, age, height, weight, etc.
From there, the site will present you with a list of insurance providers with life insurance policies that you might be approved for. If you find a provider that fits your needs, you can click through to that company and finish the application with them. Policygenius makes money based on redirecting you to a provider. Depending on the provider you choose, you may or may not have to do a medical exam, and the degree of information you have to provide will also vary. Read more in our Policygenius review.
As you get older and your lifestyle, financial situation, and health change, the amount of life insurance coverage you need will change, too. Ladder is an online life insurance provider that realizes this. As your wealth grows over time, you may not need as much life insurance. For example, if you have $1 million in a taxable investment account, you can probably get by with at least $1 million less in life insurance coverage.
You may not have $1 million in an investment account right now. Still, if you’ve followed our other advice about investing, you know that starting early and taking advantage of the power of compounding can help you get there in shockingly short order. Imagine you’re pursuing FIRE, and you have an aggressive savings rate, putting you at $1 million in just ten years. Suddenly, a 20-year term life insurance policy seems a bit overkill. So what’s great about Ladder is that you can modify your coverage levels at any time, without paying a fee or going through new applications or other frustrating experiences.
Ladder offers their life insurance policies through Fidelity Security Life Insurance Company. I mention that because their ratings are phenomenal with both A.M. Best and the Better Business Bureau. Read our full review of Ladder to learn more.
LeapLife is a bit different from others on this list, where they may be the right choice if you aren’t super healthy or have an existing health condition. For instance, someone who is overweight and not as active might benefit from using LeapLife.
LeapLife partners with about 15 different life insurance providers to help you get an instant decision on a policy without having to do a medical exam. You can also talk with a life insurance agent to help guide you through the application process and help you find a policy that suits your needs. Since Leaplife is unique, make sure you read our review to learn more about how they operate and if they’d be a fit for you.
- What is Supplemental Life Insurance and is it Worth the Cost?
- What Are the Pros and Cons of the Living Benefits Rider?
Purchasing life insurance does make you consider your mortality, but it's always better to plan for the worst than have no plan at all. By considering what would happen to your family and loved ones, if you died today, you also determine your worth (which is usually a lot more than you think it is). From there, you can start covering what needs to be covered if you die.
So, do you need a million-dollar life insurance policy?
Related: Where to Find Cheap Life Insurance
That’s up to you to decide. Use an online life insurance calculator to determine what kind of coverage or policy is best for you. If that policy is a million-dollar life insurance policy, that’s great. If it’s $500k, that’s also great. The coverage amount matters only to where it needs to take care of your family when you’re gone. If it does that, you’ve done your job.