Who Needs a $1 Million Life Insurance Policy?

In my early 20s, I lived on a budget so tight that an unexpected $25 expense could throw off my entire month. I never would have expected needing $1 million (or more!) in life insurance coverage for my modest life. But flash forward 10 years, and my husband and I ended up buying more than $1 million in life insurance between us. 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. Some experts advise thinking of coverage as a multiple of your annual income.

But “replacing income” can also be an overly simplistic approach. If you make $100,000 per year and want to purchase a 30-year policy, that doesn’t mean you should be looking for $3 million in coverage.

Life insurance isn’t meant to replace every single dollar you expect to earn in your lifetime. It does help protect 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 a UGMA or 529 account.)

Life insurance can also provide time to grieve and figure out new working arrangements. For example, stay-at-home parents or part-time workers may need to pivot to full-time work. A year or two’s worth of “breadwinner” income built into life insurance can give a surviving partner time to figure out re-entering the job market in a difficult emotional time.

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, can be a more detailed and specific way to estimate 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. Average college costs have doubled since 2000, and the average college student may face over $38,000 per year between tuition, books and daily living expenses.

Even if you choose a more affordable school and your child earns a scholarship, college costs may still be pricy.

In my family, we’ve got three children. Take $140,000 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 $420,000— already nearly halfway to a million-dollar policy.

Home

If you’re a homeowner, your mortgage is probably one of the biggest debts you have. The average price of a new home is over $500,000, and a three-bedroom home can range from $100,000-900,000, depending on where you live.

If the surviving spouse can’t afford to keep up with the mortgage, moving away from the home you shared could deepen an already-painful loss.

Add a $300,000 mortgage to estimated college costs, and my family’s life insurance needs rise over $700,000.

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

A surviving partner may need to add expenses to the normal routine to handle everything alone. For example, if you aren’t currently paying for childcare, the cost of sending two kids to a childcare center can easily cost more than your rent or mortgage.

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 supplemental money per year until your kids are grown, so they can have the experiences you imagine.

You might therefore calculate your typical budget (maybe minus mortgage, if you’d pay that off with a life insurance benefit), compare it to your spouse’s income and build in enough life insurance coverage to make up any difference for a period of time (e.g., through your kids’ childhood).

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, and it can take a little time for coverage to kick in. 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.

Whole life insurance 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), but the expense can be a major downside.

If you go with term life insurance, choose a term limit that’s long enough to help protect your family until your major goals are fulfilled. If your kids are little, that might mean 20-year term life insurance to secure coverage through your children’s college years.

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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