By now, you understand the importance of life insurance. Though we all hope it’s never needed, nothing ensures the security of your family’s financial future like high-quality coverage.
But now that you’re in the market for life insurance, a new and incredibly important question arises—how much insurance coverage does my family actually need? Isn’t a million dollars an unnecessarily large amount of money?
Well, that all depends. For some it is too much, and for others, not quite enough. So where do you fit in? Let’s look into whether you need to take out a million dollar life insurance policy.
Is a Million Dollars Too Much?
If you’re like most people, a million dollars sounds like a gigantic amount of money—and it is! However, it’s no longer the colossal sum that it once was. In fact for many families, it’s actually a very reasonable amount of coverage to seek, even for those solidly in the middle class.
Just think of how much it costs to support a family these days: rent or mortgage payments, monthly bills, food expenses, clothing, transportation—and that’s just the basics. Once you start adding in things like college tuition, summer camps, extracurricular activities, family vacations, and more, the price really skyrockets.
How Does Life Insurance Work?
Before we dig too deeply into the numbers, it’s important to have a basic understanding of how a life insurance policy actually works. Though there are several types of life insurance, chances are you’ll be looking at term life insurance. Simply put, a term life insurance policy is approved for a set amount of time—usually between 15 and 30 years. As long as you pay the monthly premium each month, in the event of your death, your beneficiaries (likely your kids and/or spouse) will receive the agreed upon payout preferably distributed via your will.
Many parents will choose their term length based on how long their children will be dependent on them financially. Once they can make it in the world on their own, your need for a high-dollar policy greatly diminishes. This makes it a smart time to apply for a new policy—ideally with a lower premium and payout.
Let’s Do The Math
How much coverage you need comes down to your personal circumstances. Are you a full-time working mother of three under three? Or are you only a couple years away from your only child leaving the nest? The costs of raising kids in these two situations will likely be vastly different.
If you’re one of the seven-in-ten moms with school-age kids that’s currently working, you’ll also have an annual income to take into account. This is a significant amount of expected finances that’d never make it to your family if you were to unexpectedly pass away.
Here’s an example scenario: Say you’re a mother of two with a three-year-old and a five-year-old, and make a salary of $50,000/year. If something were to tragically happen tomorrow, by the time your youngest turned 18, that’d be $750,000 of lost straight-up income for your family.
Now consider the addition of funeral costs, possible medical expenses, college education for two, outstanding debts, inheritance, etc. It all adds up quickly.
And don’t think that because you’re a stay-at-home-mom or work part-time, your loss would lessen the financial impact. Just think of all the services you provide for your family that would now likely have to be paid for like tutoring, transportation, cooking, housekeeping, and so much more. If you were gone, where would the money to cover these expenses come from?
When is a Million Dollars to Much?
Though often less than you might expect, a monthly premium for a million dollar policy would be higher than for a policy with a lower payout. If your family’s finances are already tight and you’re in good health, it may be smart to apply for a more affordable life insurance policy.
Or, if you’ve crunched all the numbers and either your kids are close enough to self-sufficiency, your have a partner with a significant income, or know a lower amount will cover your family, go for it! A few extra dollars every month can add up and may be better used elsewhere.
So, Is a Million Dollars Right For Me?
Most importantly, you’ll have to consider your family’s unique circumstances, both now—and in the future. Ask yourself important questions like:
- What is my annual income? Do I expect that to change?
- What is our total household income?
- How many years until my kids are self-sufficient?
- How much will college tuition cost?
- Will I help support the kids through college?
- What would a funeral cost?
- Do I have a spouse or partner that financially contributes?
- What are my outstanding loans and/or debts?
- Do we have significant savings?
- Should I leave an inheritance?
- What other costs do I need to consider?
Carefully calculate these expected expenses and contributions. What would it cost in total to supplement the finances lost in your absence? Use this calculation, plus a little bit more, to determine the ballpark of your death benefit.
Also, avoid listening to old adages like “Your payout should be your annual income times ten.” If only modern day financial decisions were that simple! Frankly, the cost of raising a family—especially through college—is higher, and more complicated than ever. Only you truly know where you stand, and what’s best for your family.
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