The Million Dollar Life Insurance Policy: Myth or Reality?

A million-dollar life insurance policy may seem more like myth than reality, but surprisingly, high-value plans aren’t just for the wealthy. If you can justify the need for that level of coverage and you're able to afford the premiums, you may be approved to purchase a plan with a million-dollar payout.

What Is a Million-Dollar Policy?

When you refer to a million-dollar life insurance policy, you're typically referencing the death benefit, which is the payout your beneficiaries will receive when you die. A million-dollar life insurance policy is one that pays a $1 million death benefit.

Is a Million-Dollar Life Insurance Policy a Lot?

The purpose of life insurance is to provide financial protection for your loved ones after you die, and although $1 million may seem like a lot of money, it may not be quite as much as you think, especially when you consider current and future expenses such as mortgage payments, college tuition, outstanding debts and the overall cost of day-to-day living. In fact, a million dollars may be what you’ll need to ensure your family's financial stability if you're no longer there to provide a regular income.

Many investment professionals recommend purchasing a life insurance policy with a death benefit payout equal to approximately 10 times the amount of your annual salary. Using these guidelines, if you make $100,000 a year, you should purchase a million-dollar policy to ensure proper coverage. Other financial experts believe this number significantly underestimates the needs of many families and suggest that coverage worth 20 times your income is a more accurate assessment. 

Who Can Purchase a Million-Dollar Life Insurance Policy?

Life insurance is intended to replace lost income and provide financial security for loved ones after your death rather than to increase your wealth. That's why you can only purchase a million-dollar policy if you can provide financial justification for the requested coverage amount.

When deciding how much coverage you qualify for, a carrier considers various factors, including your current income, overall net worth and other assets you may own. The company also considers your insurability limit, which places a cap on the amount of insurance coverage an individual may have across all life insurance policies at any given time.

Say, for example, your insurability limit is $1 million, but you already have an active policy for $500,000 through your employer. Regardless of which insurance company you select, you can only purchase an additional $500,000 of coverage, which would bring you up to your insurability limit.

In addition to financial factors, your potential insurer will probably require medical underwriting steps prior to approving your application. The underwriting process may include a written screening and a complete physical with a company-approved physician to assess your health, family history and lifestyle risks.

Because each insurer weighs risks differently, the amount of coverage you qualify for may differ among insurers, and older consumers may be assessed on a case-by-case basis, particularly if they’ve hit retirement age.

Do You Need a Million-Dollar Policy?

Before purchasing a million-dollar life insurance policy, it’s helpful to assess your family’s financial needs. To determine the amount of coverage you’ll need, you should consider two main factors: income that will need to be replaced and debts that will need to be paid.

Replacement Income

Typically, if you die, your family loses your income. Your life insurance policy should include enough money to replace your income for the period of time it’ll take your family to get back on their feet financially, so they can continue to live the lifestyle they’re accustomed to. Be sure to factor in inflation when calculating income replacement.

Debt

Current and anticipated debts should factor heavily into your decision about how much life insurance to purchase. These are a few of the expenses you may want to consider:

• Business loans
• Credit cards and other consumer debt
• Burial expenses and other end-of-life costs
• Remaining mortgage payments
• Car loans or lease payments
• Childcare
• Medical insurance and other health care-related costs
• College tuition, current student loans and other education-related expenses

When calculating your expenses, be sure to consider the amount needed to pay off your debts in full, plus the interest these debts may incur.

If you aren’t sure where to begin, many insurance companies feature debt calculators on their websites. These tools can help you determine how much life insurance you’ll need to make sure your family has adequate financial protection after you die.

How Much Does a $1 Million-Dollar Life Insurance Policy Cost Each Month?

The cost of life insurance is based on risk, so rates for a million-dollar policy vary significantly, depending on the risk profile of the insured. However, companies typically consider the following factors when determining the premium rates for your policy.

• As you get older, your health risks increase, making it more likely you’ll pass away. That means you’ll pay more for the same life insurance coverage as you age.
• Because women tend to outlive men, coverage is usually less expensive when the insured is female.
• Overall health. Most insurers require individuals to undergo a medical exam as part of their underwriting process. If you have underlying health issues such as heart disease or diabetes or a family history of these conditions, the company may charge you higher premiums.
• If you have a high-risk job or engage in hobbies that pose a threat to your health and well-being, you’ll likely be assessed higher premiums.
• Policy type. Term policies, which offer coverage for a predefined period of time, are usually less costly than permanent insurance.
• Policy length. When purchasing term life insurance, policies that are shorter in length cost less than policies with longer coverage periods.

For a healthy, nonsmoking female around the age of 25, premiums may be as low as $23 a month for a 20-year term policy. For a man of the same age, the identical policy could cost over $30 each month. By age 45, that same policy could cost a woman $68 each month, and a man that age in similar health might pay $90. At 55, that rises to about $130 and $278, respectively. 

Because cost may vary by carrier, it’s important to shop around for the best price. An insurance agent with access to quotes from multiple insurers may be able to get you the best price for a suitable policy.