1 Million Life Insurance

How much does a million dollar life insurance cost? And is it worth it (or even necessary)? Read on to find out.

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Life Insurance Basics

Experts suggest having a life insurance policy equal to 10 times your annual income or more. That means that if you earn $60,000 a year (the median household income reported by the U.S. Census Bureau in 2017), you should maintain at least a $600,000 life insurance policy.

As a general rule, the larger the insurance policy, the higher the monthly premium.

So is a huge life insurance policy worth it? Consider why you—and your loved ones—might need it:

Final Expenses
Strange as it sounds, dying costs money. After you're gone, the bills will include:

• Funeral Costs
  The National Funeral Directors Association reports the average funeral costs between $6,000 and $9,000 (not including cemetery, monument or marker costs, flowers, obituaries, etc.).

• Medical Bills
  These may include deductible, copay, and/or coinsurance costs. The totals will vary depending on your state of health before passing and the type of and coverage your health insurance provides.

Your policy will also be used to pay off other remaining debts including:

• Student loans
  The average amount of student loan debt is between $28,000 and $40,000. In 2017, over 44 million Americans collectively owed nearly $1.5 trillion in student loan debt.

• Credit Card Debt
  The average American has a credit card balance of nearly $6,500, according to Experian's annual study on the state of credit and debt.

• Mortgages
  The average monthly mortgage bill is about $1,500. But the price of your house, total of your down payment, your loan program, and your loan interest rate all factor into that cost.

Depending on your age and state of affairs when you die, you could owe tens, even hundreds of thousands of dollars.

Providing for Loved Ones
What remains of your life insurance policy will be used to help your family with additional expenses after you are gone. These can include:

• Maintaining or purchasing a new home
  The median cost of a new house is $322,637.

• Sending Kids to College
  The average cost of tuition is $34,740 per year for private colleges, $9,970 for in-state residents at public colleges, and $25,620 for out-of-state residents at public colleges.

• Buying a New Car
  The average cost of a new car in 2018 is $34,000.

• Medical Bills
  Monthly premium for a family health insurance plan averages $1,168.

Let's take a closer look at another potential need. If you have young children, your partner will likely have to either hire childcare or become a stay-at-home parent after you pass. This alone can cost hundreds of thousands of dollars throughout the child's life.

One in three families spend 20 percent or more of their annual household income on child care.

The average weekly cost of childcare at a day care center is about $200, according to Care.com. For just one year, your partner could pay $10,000 or more for just one child.

On the other hand, Salary.com reports that if a stay-at-home parent were compensated, they would earn nearly $115,000 per year. At-home duties include cooking, cleaning, laundry, carpools, childcare and running errands like grocery shopping, just to name a few.

Think about how much it would cost to pay a third party to do those things. That loss of income can add up quickly.

In other words, it won't take long before the full amount of your life insurance is allocated, even if you have a $1 million policy.

Now you know why having a $1 million policy is important. Keep reading to learn your life insurance options.

Term vs Whole Life Insurance

You've got two options when considering life insurance.

Term life insurance
Provides coverage for a certain period of time, or "term." This type of insurance policy is designed to protect your dependents should you die prematurely.

With this policy, your beneficiaries receive the full payout, or "death benefit," only IF you die within the term. The most common terms are 10, 20 and 30 years.

Term life insurance is usually cheaper because it's temporary. In fact, most term policies don't end up paying the "death benefit" because the majority of policyholders live through the end of the term.

If your term ends and you find that you still need life insurance protection, you can consider extending or renewing the coverage. You can usually choose to continue the policy on a year-to-year basis, but at a much higher monthly premium.

Most term policies do not "technically" expire until you reach age 95, so you can keep your policy in place and continue paying monthly until you decide you no longer need the coverage.

Or, if you opt for a term life insurance policy with a return of premium qualifier, you will get your premiums returned to you when the term is up.

In other words, you get back all of the money you paid towards the policy. For example, if you paid $100 per month for a 10-year term, you'll get $12,000 back (unless there are additional fees or riders on your policy).

Whole Life
Whole life insurance provides lifelong coverage and includes an investment and cash value component.

The three main benefits to a whole life insurance policy are:

1. Guaranteed cash value growth.
   Because this type of policy typically involves investing dollars, the cash value account will grow over time.

   You can normally access the cash value any time through withdrawals or loans, which you can use for retirement, emergency funds, or other bills.

   Withdrawals often come with a fee or other contingencies, so you'll want to be sure you're familiar with your policy.

2. Guaranteed death benefit.
   The death benefit is a stated amount of proceeds paid to your beneficiary upon your death.

3. Guaranteed level premiums for life.
   Whole life insurance premiums are higher because the policy lasts forever and has cash value.

   However, the premium will not increase or decrease throughout your life, so it's easy to budget for.

Which policy is right for you?

Choose Term If: You need life insurance only to replace your income over a certain period. This could be the years you're raising children or have an outstanding mortgage. This coverage is also more affordable.

Choose Whole If:

• You want to provide money to your heirs to pay estate taxes.
  
• You have lifelong dependents, such as a child with special needs.
  
• You want to spend your retirement savings but still leave an inheritance for your beneficiaries.

What Determines the Cost of Life Insurance?

As we have discussed, whole life insurance policies cost more than term overall.

While there are several factors affecting the prices of both, the primary ones are your age and health.

Monthly premiums increase the older you get and the unhealthier you are, especially if you have pre-existing health conditions that can affect your mortality rate like

• Heart disease
  
• Cancer
  
• Diabetes

These conditions present a higher chance you will not live to the end of your policy term, and you therefore wouldn't pay the full amount of the policy before death.

Other health factors include whether or not you are a smoker, your lifestyle, family history, occupation and hobbies.

The policy term also affects the premium. For example, a 10-year policy will have a lower premium than the 20-year. Reason being: the shorter the term, the less likely it is that you will die before the term expires.

The total amount of the policy also matters. But having a $1 million policy doesn't necessarily mean you will pay double the premium of a $500,000 one. Keep reading for price estimates.

How much will a $1 million life insurance policy cost?

Term Life Policy
The chart below gives an example of the estimated average annual cost for a 10-, 20- and 30-year term life policy for a generally healthy, non-smoker.

When you break it down, you could be paying as low as $20 a month.

Whole Life Policy
This chart shows an example of the estimated average annual cost for a whole life insurance policy for a generally healthy, non-smoker.

While these monthly payments are much higher, ranging from $700 to 1,500, you may find that the benefits of this type of policy outweigh the increased cost.

How Do I Calculate My Life Insurance Needs?

You can find many life insurance needs calculators by doing a quick internet search. Use these to calculate what you need by answering questions like:

• How much money will be needed for burial expenses?

• How many years of income will I need to cover?

• How much annual net income will my beneficiaries need?

• How much money do I have in savings and investment accounts?

• How many children do I have?

• Are there any one-time expenses I wish to fund (like a wedding, new car, new home, etc.)?

• What debts do I have that will need to be paid off?

Even if you already have life insurance support through your current job, here are two considerations before deciding if you do or do not need more.

• Most jobs only offer two or three times your annual salary as a payout. If you make $60,000 annually, your policy is probably only $120,000 - $180,000. Looking back at everything your policy will cover after your death, this probably isn't enough.

• The policy will end if you leave that job. Until you start another job and that company's policy kicks, you are not covered should something happen to you.

  So while you may have some coverage through your job, you should consider an additional policy.

Am I Ready to Purchase?

Now that you've estimated how much life insurance you'll need, it's time to buy.

There are three ways you can purchase life insurance:

1. Directly from an insurance company.
   While this route typically ensures buying from a large, reputable insurer, it also may not get you the best price.

2. Through an independent local insurance agent.
   These agents generally represent multiple companies, so they are able to compare more prices and often get you a better quote.

3. Through an independent online broker.
   Purchasing online may seem faster and easier, but keep in mind life insurance policies and costs can be confusing, so it may be more difficult to do it on your own.

Read on to learn about the life insurance application process.

Qualifying for Your Policy

Once you choose a policy, you'll have to actually apply. This process can take several weeks because it's quite lengthy—and personal. Here are the steps:

1. Speak to an Agent
   You'll need to meet with an agent to:
   
   • Verify information you provided during the quoting process.

   • Answer additional questions about your needs.

   • Confirm that the quote you selected is best for you.

   Usually you'll be sent paperwork to fill out and sign to confirm your intent to buy.

2. Have a Medical Exam
   Many insurance companies require an exam to verify the information you gave about your health is accurate.

   They will record your medical history, take blood pressure, and do a simple blood test to test for diseases, drug use, cholesterol and glucose levels, etc.

Once complete, the information will be sent to the insurer, who will analyze the results and decide whether to insure you or not. They'll also determine your monthly premium.

When your policy is approved, you'll be notified and receive a full copy of the policy. Typically, you'll also be asked to make the first premium payment.

Here are some important things to remember:

Before finalizing your purchase, read through the terms of the policy carefully.

Take time to understand what is and isn't covered by your policy, if there are contingencies on the payout, or barriers to cancelling the policy.

• Make sure you are able to afford the monthly premium payments long term.
  Consider what will happen if you lose your job or have to tap into your savings for an emergency.

• Don't be afraid to talk to an insurance agent and ask questions.
  While there are many online tools, there are also many nuances and questions you may have about the specific coverage you need. These agents are there to help you and dissuade your concerns.

• Don't wait.
  You may not think you need life insurance now, especially if you are young, single, and/or don't have children. But it's important to purchase a policy when you are young and healthy, as that is when you will get the lowest monthly premium.

Revisiting Your Policy

Review your policy every few years to make sure it's still adequate for your needs. Here are a few things to think about:

• Did you recently get married?
  You'll need to be able to support your new spouse for better or for worse, including taking on their existing debts. Your policy should be able to support both of your expenses should you die.

• Did you have a baby?
  One of the uses of your life insurance policy is supporting your children, from child care to college tuition.

• Did you purchase a new house?
  Your policy will help pay off your mortgage so that another loved one doesn't have to.

• Did you start or graduate college?
  Your policy could also help pay off student loan debt so it doesn't fall to someone else to take care of.

• Were you diagnosed with a serious or terminal illness?
  Sometimes people wait until a diagnosis before even thinking about life insurance. If you do plan ahead, a new diagnosis may add additional concerns or considerations that you want to ensure are covered.

• Did you get a new job?
  If you are earning more money than you did when you first purchased your policy, you will need to increase the coverage in order to keep up with your income contribution.

• Did you start a new business?
  If you are self-employed or running your own business, your policy should be able to help pay off outstanding debts or assist in continuing to operate the business (should those be your wishes).

Talking to a life insurance agent may be especially helpful as they will be able to ask the right questions and gather the information you'll need in order to make an informed decision.

Bottom Line

Sometimes it can be difficult to plan for the future, especially when thinking about what will happen to your loved ones after you're gone. That's why it's important to prepare by having a sufficient life insurance policy.

When you calculate all of the bills and financial support your family may need, a $1 million policy could be a good investment.