Who needs a one-million-dollar life insurance policy & why?

One million dollars of life insurance coverage sounds a bit extreme... or is it? From six-figure-income earners to business owners and large families, this amount of coverage is realistic for more individuals than you might think.

A million dollars isn’t what it used to be. Yes, it’s still a lot of money. But $1 million doesn’t have the same buying power it once had. It isn’t enough to provide lifetime fiscal security. It still sounds like a lot of money, but in reality, it isn’t as much as you probably imagine.

How much is $1 million?

In 1979, pitcher Nolan Ryan became the first professional baseball player to sign a contract that paid $1 million for a single season. In 2021, the average major league salary is over $4 million.

Forty years ago, if you made $300,000 in income, you earned the equivalent of what $1 million is worth today. Go back 50 years, and earning $145,000 a year was the same as earning $1 million today. If you earned that much in the 1970s, it stands to reason that a person making 3 times to nine times more than you would seem extremely wealthy.

In 1980, there were roughly 500,000 millionaires in the U.S. A recent survey shows there are 13.61 million households with a net worth of $1 million or more today, not including the value of their primary residence. That’s more than 10 percent of households in the U.S.

The point is, 40 or 50 years ago, $1 million was A LOT of money. Today, it’s — shrug — a lot of money.

A person who wins $1 million today in a lottery or contest probably couldn’t retire forever, especially if they’re young.

So if $1 million of net worth doesn’t make you abundantly rich, then it’s safe to say a $1 million life insurance policy isn’t an excessive amount of coverage.

In fact, it’s likely there are more people than you realize who are justified in owning a policy of that size. You may be one of them.

How much is a million-dollar life insurance policy?

To understand why one needs $1 million of life insurance, it helps to understand how experts calculate a person’s need for coverage.

There are a number of templates, calculators, and rules of thumb available.

One commonly held belief in the industry is that adequate life insurance equals 6 to 10 times your current annual salary. That means if you earn between $100,000 to $167,000, under this guideline you should have a $1 million policy.

There are a number of jobs in various industries that pay an average of more than $100,000. These include software developers, nurse practitioners, optometrists, airline pilots, attorneys, real estate agents and property managers, just to name a few.

Another common rule of thumb is to multiply your current annual salary by the number of years left until your anticipated retirement. That means if you currently earn $60,000 annually and you have 20 years until you reach retirement age, you should have $1.2 million in coverage.

There is also the standard-of-living method. With this formula, you take the amount of money required to maintain your current standard of living and multiply it by 20. The standard of living method is based on the concept that survivors can withdraw 5 percent of the total benefit each year while investing the rest. If the survivors can earn at least 5 percent annually on that investment, they can essentially replace the income they withdrew.

Under this method, if your family requires $50,000 a year for their standard of living, you should have $1 million in coverage to provide for them should you pass away.

Learn More: How Much Does Life Insurance Cost?

Other reasons you may need a million-dollar life insurance policy

In addition to your income, there are other factors that may warrant $1 million or more in life insurance. These include:

You owe a lot of money

One of the primary purposes of life insurance is to help pay off the debts of the deceased, many of which will not be forgiven just because you die. Your mortgage, credit card bills, auto loans, personal loans, and private student loans will need to be repaid by your estate upon your death. If you have significant debt, a $1 million life insurance policy can cover those obligations and still leave money left over for your beneficiaries.

You have a big family

According to the USDA, it costs an average of $234,000 to raise a child from birth to age 17. If you have four or more children, it could cost you $1 million or more to cover their food, clothing, health care, and other needs. This does not include the cost of college tuition. The more dependents you have, the more likely you need $1 million or more in life insurance.

You have a child with special needs

Caring for a child with special needs for the duration of their life could get expensive. A large life insurance policy can ensure the child’s care expenses can be covered.

You live where the cost-of-living is high

A person making $40,000 in Des Moines, Iowa probably won’t need a $1 million life insurance policy. But that same person with the same job in San Francisco, California earns, on average $90,000 a year. What’s more, whereas the median home value in Des Moines is just under $320,000, it’s more than $1.2 million in San Francisco. A person living in San Francisco may need $1 million in life insurance for their family just to cover the mortgage balance.

You own or co-own a business

Life insurance is often used by entrepreneurs to keep their businesses afloat following an untimely passing. The policy’s death benefit can cover the expenses needed to recruit a professional to manage the business in your place.

If you’re a partner in a business, life insurance can also provide the funds needed for the remaining partners to buy your share from your estate. And if the transfer of your business to heirs might incur an estate tax, a life insurance policy can help your heirs pay that bill.

The amount of life insurance you need, whether it’s $1 million, more than that, or less, will depend on your individual situation, which includes your budget for life insurance premiums.

Learn More: Life Insurance for Small Business Owners


Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.

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