Do I Really Need a Million-Dollar Life Insurance Policy?

You don’t need to be a millionaire to qualify for a large life insurance policy.
Katia Iervasi
By Katia Iervasi 
Edited by Lisa Green Reviewed by Tony Steuer

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For Seattle-area resident and business owner Jae Jun, a family friend landing in the hospital left him feeling shaken — and asking some of life’s big questions.

At the time, he was five years into running an e-commerce company with his wife. The pair were also financially supporting his wife’s mother, who had moved to the U.S. from Korea and had no income of her own.

Until that point, Jun hadn’t thought about a financial safety net beyond their savings. But while his friend was recovering, the wheels started turning.

“It really made me think: That could happen to anybody. And then what happens? I started reading articles and talking to people and figured it was time to look into life insurance,” Jun says.

His goal? To buy a policy that would cover at least a year’s worth of personal and business expenses, and provide for his mother-in-law in the long term.

After doing the math, he and his wife purchased two million-dollar life insurance policies lasting 30 years: one for each of them.

Crunching the numbers

“You don’t have to be a millionaire to get a million-dollar policy,” says John Carroll, a senior vice president at LIMRA, a life insurance trade group.

Life insurance is designed to ease the financial burden on your loved ones if you die. They can use the money to cover your funeral and burial costs, as well as everyday living expenses, such as groceries, child care and rent. A life insurance payout can also help your family pay for college tuition or, in Jun’s case, care for aging parents.

When you consider everything you pay for now — and everything you expect to pay for in the future — a million dollars’ worth of life insurance might not seem like a lot.

To calculate how much life insurance you need, Carroll says one guideline is to multiply your annual salary by 10, then take out a policy to match.

So, if you earn $100,000 a year, you could be a candidate for a $1 million life insurance policy.

Salary isn’t always a complete picture, though. You can also use the DIME method, which is an acronym for Debt, Income, Mortgage and Education, to work out whether you need a million-dollar policy. Add up the following:

  • Debt. The money you owe, like student loans and credit cards.

  • Income. Think about how many more years you’ll have financial dependents relying on your income, and then multiply that by your salary. For example, if you have toddlers, you’ll likely want enough life insurance to cover them until their college years.

  • Mortgage. The balance left on your mortgage, if any.

  • Education. The funds required to pay for your kids’ tuition.

Once you total those costs, subtract any savings, liquid assets and the value of other life insurance policies. The number you end up with is equal to the face amount of life insurance you might need.

🤓Nerdy Tip

Another way to figure your life insurance needs is by calculating your income replacement. If you’d like your payout to replace $50,000 of annual income, divide that $50,000 by a reasonable return rate of 5%. This would come out to $1 million of coverage ($50,000/.05=$1,000,000). With this method,  your beneficiary can invest the $1 million payout to receive an indefinite income stream, or they can use the principal at some point to fund college expenses or retirement needs.

The million-dollar question (pun intended)

In the U.S., 20% of term life insurance policies sold in 2020 were worth at least $1 million, according to LIMRA.

It’s a popular option, and a relatively affordable one, too.

The cost of a $1 million life insurance policy, like any other coverage amount, comes down to a range of factors such as your age, gender, health, hobbies, occupation and whether you smoke.

Let’s look at a 20-year term life insurance policy for nonsmokers. A 30-year-old man in excellent health can expect to pay $350 a year for a million-dollar policy, according to Quotacy, an online life insurance brokerage. That’s just under $30 a month.

The average cost for a woman of the same age is slightly lower, at $276 a year, or about $23 a month.

To get the best possible price, compare life insurance quotes from a handful of companies.

Applying for a million-dollar life insurance policy

When you apply for any life insurance policy, the insurer wants to know: Do you need this much coverage?

To get their answer, insurers typically ask for proof of income as part of the application. With most companies, you’ll qualify for coverage worth a maximum of 10 to 30 times your annual salary.

If you’re hoping to buy a policy worth $1 million or more, you might need to answer a few extra questions about your finances.

“They want to make sure you can afford the premiums,” Carroll says. “If a policy lapses, it doesn’t do anybody any good.”

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