At first glance, a $1 million life insurance policy might sound like a lot of life insurance—perhaps too much life insurance.
We’ll go through the basics and beyond, and break down how a $1 million policy could help set up the people who matter most.
Here’s what we’ll be covering:
What is life insurance?
Life insurance helps keep the people you care about financially protected in the event that you are no longer around.
If you’re approved for life insurance coverage, you pay a premium, and in exchange, the insurance company offers the people in your life some financial protection if you were to pass away. If a life insurance claim is approved, your loved ones, aka beneficiaries, can receive a lump sum payment from the insurer, also called a ‘death benefit’, which they can use to cover expenses big and small, such as short-term (final expenses) or long-term (college tuition for your kids).
The death benefit can be spent without limitations.
Term vs. whole life insurance
We go into much greater depth between the differences between term and whole life insurance here, but we know your time is valuable, so we’ll give the TL;DR version.
Term life insurance covers you for a predetermined period of time, or term.
Let’s say you apply and are approved for a $1 million, 20-year term life insurance policy. If you were to pass away within those 20 years, your beneficiaries would receive the $1 million death benefit from the life insurance company. But in the likely event that you’re still alive after 20 years (woop woop!), your coverage expires, there’s no payout, and you’re welcome to apply for a new policy.
Term life premiums tend to be relatively low, because in most cases, policyholders are still alive at the end of their coverage. Because the insurance company isn’t obligated to payout most of the time on term life policies, they’re able to transfer savings onto policyholders.
In the interest of full transparency, Lemonade now offers no medical exam term life insurance, and we think it’s a pretty great deal. With Lemonade’s term life insurance offering, you can apply for up to $1.5 million in coverage, for terms of 10, 15, 20, 25, and 30 years. The application process is 100% digital, so you can apply for coverage basically anywhere.
Whole life insurance is a type of permanent life insurance, which basically guarantees a death benefit payout when the policyholder dies—whether that’s in 5 or 50 years. Over time, a whole life policy also builds cash value, which the policyholder can borrow or use to cover premium payments.
According to Investopedia, premiums for whole life insurance can be up to 10 or 15 times higher than those for term life insurance. Why’s that? Well, with whole life insurance, a death benefit payout is basically guaranteed (assuming the claim is approved, of course), because the policy lasts as long as the policyholder lives.
Do I need a $1 million life insurance policy?
$1 million is a sum so large that, to many of us, it feels like an amount reserved for game shows and heist movies. But once you do the math (don’t worry, it’s pretty simple), $1 million feels a whole lot smaller.
Losing a loved one is devastating, and the main purpose of life insurance is to help offset some of the financial hardship that comes with it. In order to find the right death benefit amount, you’ll have to crunch the numbers to figure out how much money could help your loved ones recover financially in the event of your death.
The most significant financial contribution you probably make to your family is through your salary. One rule of thumb when determining life insurance coverage is to multiply your annual salary by 10 to reach your desired coverage amount. So, if you make $60,000 a year, a $600,000 policy could keep your family financially afloat with living expenses for the near future.
Stay-at-home parents should definitely not count themselves out when it comes to life insurance—even if they technically don’t take home a salary. Childcare, cooking, cleaning, and managing a household are equivalent to around $160,000 in annual income.
But life insurance doesn’t just have to be income replacement. Now, think about other financial obligations that lie ahead, or that you might leave behind.
For example, if you have kids, you might want to cover their college tuition with your life insurance payout. That can easily add a couple hundred thousand dollars to the value of your policy.
You might also want to cover your outstanding debts, like mortgage payments, private student loans, and credit card debt. According to CNBC, the average American has an average of around $90,000 of debt. By factoring in your remaining debt into your life insurance policy, your family can comfortably pay it off if you were no longer around.
$1 million doesn’t seem like such a huge sum anymore, now does it?
How much does a $1 million life insurance policy cost?
There are a number of factors that determine the cost of a life insurance policy, including:
- The type of policy
- The amount of coverage
- Medical history
- Term length (for term policies)
The above factors will also determine if you might get denied for a policy in the first place. Older, less healthy applicants are more likely to be denied coverage, or be quoted significantly higher premiums than younger people in good health.
Besides your personal stats, it bears repeating that the amount of coverage you choose will play a significant role in how much you pay on premiums. If approved for coverage, a $1 million policy will cost more than a $50,000 policy. That’s just common sense.
You might be inclined to save as much money as possible on life insurance, but paying more on your premiums could be worth it to get the coverage your loved ones really need. Peace of mind is priceless.
But hey, before you make any big financial decisions, be sure to chat with an insurance agent or a financially savvy person to make sure you’re making the right decision for you.
Before we go…
Finding the right amount of life insurance coverage is an entirely personal decision. Many people find themselves considering life insurance when they get married, have kids, or make big financial moves like buying a house or becoming business owners. We know that this isn’t a decision to take lightly.
Looking to further expand your life insurance knowledge? Read our Ultimate Guide to Life Insurance, and get a better sense if life insurance is worth it for you.
While you’re at it, go ahead and apply for term life coverage offered by Lemonade. It’s free, easy, and 100% digital.