When you first hear it, a million dollar life insurance policy may like a lot! But a closer look at your life insurance needs may show otherwise.
For example, if you earn $100,000 a year and would like a life insurance coverage to act as an income replacement tool for your surviving spouse for 10+ years, then a $1 million payout makes sense. Or if you have a large family, a mortgage, and not many assets, your family may need a sizable payout to be able to live comfortably after you’re gone.
Don’t assume a $1 million dollar policy is something that you won’t be able to afford. A million dollar policy is probably less expensive than you think.
Continue reading to find out whether you need a million dollar life insurance, and if a million dollar policy would actually cost a million dollars.
What is a million dollar life insurance?
A million dollar life insurance policy has a death payout (also known as the face amount or face value) of $1 million. If you pass away while your policy is active, the insurer will pay a million dollars to your beneficiary.
Typically, insurance proceeds are paid as a tax-free lump sum, but your beneficiary can choose to receive them in installments. In that case, any interest collected on the death payout will increase your beneficiary’s taxable income.
Why would I need a million dollars of insurance?
If you are like most people, you are likely buying insurance to secure your family’s financial future, in the event of your untimely death. So, it might be a good idea to purchase a million dollar life insurance policy if your family will likely need that much money to live comfortably.
How can you quantify your insurance needs?
There are different methods to do this. The easiest one is multiplying your annual income by 10. If you earn $60,000 a year, then you are looking for a death benefit of ~$600,000.
Another method recommends multiplying your annual salary by 10 and adding $100,000 per child to cover college expenses. So if you make $60,000 a year and have three children, you would need a life insurance policy with a $900,000 payout.
The third method, which makes use of the DIME formula, expresses your life insurance requirements as the total of the following:
The sum total of all your debts (except the mortgage)
Your annual salary is multiplied by the amount of time for which you expect your family will need support. For instance, if your family will need protection for the next 15 years, multiply your annual salary by 15
Your current mortgage balance
The estimated cost of sending your kids to college
Factors that affect the cost of life insurance
The cost of life insurance depends on your personal factors, policy-specific details, and choice of insurer.
Your age is the single most important factor in determining your premium rate. Generally speaking, the older you are, the higher the premium. When you buy a life insurance policy later in life, say on your 50th birthday, you will likely pay more than someone who buys life insurance coverage early, say in their 30s.
For term life insurance, the likelihood of the insurer having to pay out the death benefit is greater for older applicants, which is why they pay more.
Whether you need permanent or term life insurance, buying coverage early in life allows you to lock in low rates for the duration of the life insurance policy. Our analysis shows buying life insurance in the 30s can lead to huge savings compared to buying coverage in the 50s or 60s.
For a million dollars policy with a 20-year term, a 30 year old male pays 50% less than a man aged 40. For women, buying coverage early can lead to even greater savings. On average, 30-year-old females pay 65% lower life insurance premiums than those aged 40.
Waiting until age 50 to purchase a life insurance policy increases the life insurance cost of coverage by 260% for both men and women, compared to the cost for a 30-year-old.
Women tend to have longer a lifespan than men, so they pay a less for coverage. However, the price difference between the two varies by age.
Looking at a million dollar life insurance policy with a 20-year term, here is how gender impacts the cost:
- Age 30 – Men pay 38% higher premiums than women (roughly $130 more annually)
- Age 40 – Men pay 25% more than women (about $144 more annually)
- Age 50 – Men pay 38% higher premiums than women (which comes to roughly $480 annually)
- Age 60 - Men pay 44% more than women (about $1,536 annually)
Your life insurance rate is based on your expected life expectancy. The longer you are likely to live, the better your rating and the lower your premium.
If you are in good shape, there’s a great chance you will qualify for a preferred plus or preferred rating, both of which have lower-than-average premiums. In contrast, an underlying condition that can potentially reduce your life expectancy will likely bump up the premium rate.
Family medical history
Life insurance companies not only look at your medical history but also your family’s. They do so because certain illnesses tend to run in the family. If your family medical history reveals a genetic predisposition toward a severe health condition, you may have to pay more for coverage.
On average, smokers live less than non-smokers. So if you smoke, expect to cough up (pun intended) two to three times more for coverage than a non-smoker. However, the good news is that just a year after quitting cigarettes you could qualify for lower rates.
While deciding your premium rate, life insurers will consider your risk of dying due to a work-related injury or illness. If your job includes dangerous duties, your cost of insurance could go up. For example, a firefighter or an aircraft pilot will likely receive a higher premium than someone with a desk job, such as a computer engineer.
As part of the screening process, insurers are likely to ask you some questions about your lifestyle such as:
- Dangerous hobbies. Your cost of insurance will go up if you engage in dangerous activities, like paragliding or scuba diving.
- Driving history. Insurers will likely rate you as a high risk if you have a history of reckless driving or DUIs.
- Financial factors. Insurance companies will take into account how much you earn to decide whether you really need a million dollar life insurance policy.
Type of policy
Life insurance policies are of two kinds: term and permanent. Permanent life policies guarantee a payout to your beneficiary, provided you pay the premiums. Typically, these policies also accumulate cash value, which you can use while still living.
Permanent life policies can be 5 to 15 times more expensive than term life insurance, depending on the type of permanent life plan you buy. Whole life insurance offers more guarantees than universal life policies and hence is costlier. With term life insurance, the longer the term length, the higher the cost.
Your choice of insurer
Life insurance policies with similar coverage at different insurers can vary widely in premiums. For this reason, it is essential to compare and pick a good life insurance company to get a good million dollar policy.
How much does a million dollar term life insurance policy cost?
Term life insurance provides insurance coverage for a limited period. How much coverage? This period could be a certain number of years, like 10, 20, or 25 years. Or it could be until you reach a specific age, like 65. Your monthly premium rate and death benefit remain the same throughout the policy term.
Your beneficiary receives a tax-free lump sum if you pass during the policy term. Your policy automatically terminates when it reaches the end of its term unless you renew or convert to permanent life insurance.
How much you pay for a million dollar term life policy depends on many factors, including your age, health, gender, smoking status, and policy term. But one thing is certain. The younger you are when you take out a policy, the less expensive your term life insurance rates will be. For example, a 10-year term plan with a death benefit of $1 million costs only $38 a month for a healthy, non-smoking 30-year-old male.
How to purchase a million dollar life insurance policy?
The first step to buying a million dollar life insurance policy is to determine whether you need a term or permanent life insurance policy. Term life insurance rates are cheaper and easier to understand than permanent life insurance. For most people, term life is good enough. However, if you have unique needs, such as a special-needs child, a permanent policy may be worth the cost.
If you decide in favor of term life insurance, the next step is to determine the life insurance policy term. For example, if you want coverage until your children complete college in another 14 years, you should at least be looking at a 15-year term life plan.
The next and last step is to get quotes from multiple providers. Since premium rates for similar coverage can vary wildly from one life insurance company to the next, comparison shopping is the only way to ensure you get the best bang for your buck for a million dollar life insurance.
Frequently Asked Questions
Is life insurance taxable?
Typically, life insurance payouts are not taxable in Canada. That means your beneficiaries will not have to report the death as additional income on their tax return. However, there are two situations in which a death benefit can be taxable.
Your beneficiary receives interest on a life insurance payout
Generally, death benefits are paid in a lump sum after the passing of the insured. However, if your beneficiary chooses to take the payment in installments, the interest paid to him or her may be taxable.
The insurance proceeds go to the deceased’s estate
If you name your estate as the beneficiary, the payout is taxable. Keep in mind that in certain situations your policy proceeds go to your estate — and consequently are subject to tax — even when you didn’t name it as the beneficiary. This can happen if:
- You did not name a beneficiary
- Your beneficiary predeceased you or is not traceable
Is a million dollar life insurance policy worth it?
Many experts recommend buying a life insurance policy with a death benefit that is 5 to 15 times your annual income. So if you make $90,000 a year, purchasing a million dollar life insurance plan makes financial sense. You may also need that much coverage if you expect significant expenses in the future and do not have other assets to cover them.
For instance, if you have four children, a $1 million dollar policy can provide your surviving spouse with enough money to put all of them through college. You may also need so much coverage if you have a special-needs child who will need expensive medical care throughout his or her life.
To sum it up, a $1 million life insurance policy can be worth the cost for certain individuals. A detailed look at your life insurance needs will tell you if your family needs so much coverage.
How are life insurance proceeds paid out?
Your beneficiary must inform the insurer about your passing and submit the claim form and relevant documents, such as your death certificate and a document to support their identity. The insurance company will then validate the claim and, if everything is in order, will issue the death benefit directly to your beneficiary.
Most life insurance payouts are paid as a lump sum, but your beneficiary can choose to receive the benefit in installments. However, in that case, any interest earnings will be subject to taxation.