Somewhere over the past few decades, a strange notion has crept into the minds of people: they need $1 million of life insurance coverage. Of course, that number sounds nice, and it’s often cited as the magic number for retirement, too. But do you really need that much coverage in life insurance?
What Does $1 Million Life Insurance Policy Look Like?
$1 million sounds like a lot of money because it is a lot of money, but how far will that stretch for your family if you pass away? The best way to think about this is to use the 4% rule. This is a concept that’s used with retirement accounts to slowly withdraw an amount of money, making it last for longer.
According to Forbes, if your beneficiary withdrew 4% annually from a $1 million policy, it would give the beneficiary about $40,000 a year to live on for as long as there’s money. This timeframe is a bit flexible, since it depends on if the money is invested and grows over time or if it simply earns a small amount of interest in a bank account.
Of course, that annual amount can be larger if needed, but the beneficiary needs to remember it will run out faster.
How Much Does A $1 Million Life Insurance Policy Cost?
Now that you’ve seen how a $1 million policy can help your family function in your absence, you may be wondering how much it costs. Policy costs will vary depending on the person and the type of life insurance you want to get. We can look at a very simplified answer though, which may or may not work for your situation.
For a standard 20-year $1 million term life policy (meaning you’re only insured for 20 years), a healthy 20-year-old male might pay as little as $36/month and a female would cost $30. If you’re young and starting a family, this is an affordable option to help ensure your family is taken care of. However, as time goes on, your age becomes a risk factor. So, for the same person, at 45 years old, the male will pay $99/month and the female will pay $76.
This means if you’re contemplating a life insurance policy, it’s smart to at least start off with an affordable term life policy.
A $1 million life insurance policy may not be as expensive as you think. If something should happen to you and your family needs to carry on, would an estimated $30 to $100 monthly premium for a $1 million term policy be worth it to you?
How Much Do You Really Need?
By now, you may have determined that you actually need more than $1 million — or maybe less if you’re single or you and your spouse are co-breadwinners. So, how do you know how much you personally should have?
Forbes advises you use this simple equation: the annual income you need to maintain your lifestyle x 25. This will give you that amount of money for a quarter century. However, make sure to mentally account for taxes as best you can. You can also take into consideration any savings or investments you have that may not require the money to stretch out for 25 years. At the end of the day, you want your family to be provided for, and you also don’t want to break the bank. Find a happy medium between the two, and that’s the amount of life insurance you should get.