Who Needs a $1 Million Life Insurance Policy?

In my early 20s, I hustled between three part-time jobs, living on a budget so tight an unexpected $25 expense could throw off my entire month. A $1 million life insurance policy sounded more like a plot device in a movie than anything that could apply to my real life.

Flash forward 10 years, and my husband and I ended up buying a $1 million life insurance policy. Here’s how we ran the numbers to come to that level of coverage, and how you can check what makes sense for you.

What Does It Really Mean to ‘Replace Income’?

One common refrain in life insurance is that your coverage helps replace income you would’ve brought in for your family if you pass away. That’s why many experts advise thinking of coverage as a multiple of your annual income. (Many recommend five to 10 times your salary. How much life insurance do you need?) 

But some financial advisors warn that talking about “replacing income” could lead to a simplistic approach. Paul Sydlansky, a Certified Financial Planner at Lake Road Advisors, says, “Replacing income is a common misconception. If you’re 30 years old and make $100,000, and you plan on working another 30 years, it wouldn’t make sense to get $3 million in coverage.”

Life insurance isn’t meant to replace every single dollar you expect to earn in your lifetime. It does help replace your financial contribution to your family by covering needs or goals that are important to you, and your current income and lifestyle can be a guide to the standard of living you want them to maintain. For example, do you expect your kids to go to private school? Sleepaway summer camp? (For what it's worth, you may be able to pay for things like that with an UGMA or 529 account.)

Life insurance can also provide an emotional cushion if your family is struggling without you. “If your spouse passes away, you don’t know how you’re going to react,” Sydlansky says. “You may like to have a year or two’s worth of salary to step back and take off that pressure to race back to work.” 

How a $1 Million Policy Breaks Down

Following a needs-based approach, where you calculate how much it will cost to cover financial priorities for your family, is often better than choosing a multiple of your salary for life insurance coverage. These are a few of the top expenses families want to cover.

College costs

Raising kids is expensive, and like in most video games, the final (financial) battle is often the biggest: paying for college. Sydlansky says covering future college costs is the number one reason most of his clients purchase life insurance.

“For a four-year school, you could be looking at upwards of $275,000,” he says. Universities like Columbia University, Sarah Lawrence College and Vassar College cost upwards of $70,000 annually for full tuition, room and board and other expenses.

Of course, you may expect your child to choose a more affordable college and apply for financial aid. The point is, college is still likely to come with a substantial price tag. 

In my family, we’ve got two children, and who knows if we’ll decide to have another kid in the next few years. Take $80,000 for four years of college (we can’t predict how much financial aid we’ll receive), multiply by three to be safe, and you’ve got $240,000.

Home

If you’re a homeowner, your mortgage is probably one of the biggest debts you have. A 3-bedroom home can cost more than $400,000, depending on where you live. 

If the surviving spouse can’t afford to keep up with your mortgage, moving away from the home you shared could deepen an already-painful loss. Sydlansky says clients often make it clear that they’d want their family to be able to keep their home, if they choose to. 

Add a $200,000 to 250,000 mortgage to estimated college costs, and you could be about halfway to a million-dollar policy.

Time out of work

Losing a spouse is a devastating blow. The surviving partner might need time to grieve, go to therapy, or consider where the family will live (e.g., a surviving partner might choose to move nearer to family). 

If the surviving partner didn’t work outside the home, finding a job could take time. A life insurance payout could replace a few years of your salary in this case, supporting your family as they figure out what’s next.

Providing some replacement funds for retirement could also be an important goal. In my family’s case, the way we split finances means my spouse takes on a heavier share of retirement saving. Life insurance funds could provide an alternate source of retirement money if he were to pass away.

Covering two years’ worth of income and 10 years’ worth of retirement contributions (figures that felt right for my family to accommodate time off, job adjustment and savings—other families may calculate their needs differently) can easily add up to a significant portion of a million-dollar policy.

Debt

Some debts, such as certain student loans, won’t pass on to anyone else after you die. Others will. You probably don’t want your partner to struggle to pay off personal loans or credit card debt on their own. Average household credit card debt is over $8,000, and you may be paying off your car or other loans as well.

Everyday and hidden expenses

Sydlansky recommends thinking through expenses you’d have to add to your normal routine if you were handling everything on your own. “Let’s say you have a married couple, and one spouse works and one stays home with the kids. A lot of times, the spouse who stays home won’t have life insurance, and I think that’s a big mistake.”

Childcare can cost as much as a mortgage, depending on your area and which daycare you choose. The surviving partner might want to have the option to pay for other services to make life easier, too. House cleaning, meal services or therapy to care for family members’ mental health could all be things you don’t pay for now, but would benefit from if you’re parenting solo.

You and your partner may have planned a life that includes certain things, like camp, vacations or extracurricular activities. One person’s salary may not be enough to afford all the enriching experiences you hoped to give your family. It may feel important to factor in a certain amount of money per year until your kids are grown that would let them have the experiences you imagine. 

If your kids are young, even a relatively small supplemental income could add up to a substantial amount over time. Even $800 to 1,000 monthly can add up to a six-figure sum over the course of your kids’ childhood. You might therefore calculate your typical budget (maybe minus mortgage, if you’d pay that off), compare it to your spouse’s income and make up any difference accordingly.

How to Get a Million-Dollar Life Insurance Policy

First, it's worth noting that when you apply for fully underwritten life insurance, you're not guaranteed to be approved for coverage. But the simplest answer to this question is: To get a million-dollar life insurance policy, start by applying.

Whether or not you're approved for coverage will depend on a number of factors, including but not limited to:

• Your age and gender

• Your health situation

• Your financial situation

• Your lifestyle, including risky hobbies

• Does $1 million in coverage make sense given your existing financial picture?

What Kind of Life Insurance Is Right for Me?

When you’re considering a million-dollar policy, the question of premium costs is important. High coverage doesn’t need to mean high premiums, depending on what type of insurance you buy.

“Too many young people have whole life insurance, and I think they don’t need it,” Sydlansky says. Although whole life can be a viable choice, and may be the best choice in some cases (e.g., people with certain health issues may have reason to choose whole life coverage), the expense can be a major downside.

“I don’t like it when life insurance is sold as an investment,” he says. “To me, insurance is protection against risk; it’s not an investment. It’s the same way I don’t view your primary home as an investment. You need a place to live and the ROI shouldn’t be a sole driver when you buy a home.”

If you go with term life insurance, choose a term limit that’s long enough to protect your family until your major goals are fulfilled. If your kids are little, that might mean 20-year term life insurance to get them through college. (What's the difference between term and whole life insurance?)

The amount of coverage that’s right for you ultimately depends on the cost of reaching the goals you’ve imagined for your family. Acting early to buy life insurance often means considering a large policy amount, because you’re protecting so many years. 

Hopefully your partner will never find themselves receiving this particular $1 million, but knowing it’s there if needed can make you feel more secure.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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