A million dollars’ worth of life insurance coverage may sound like a lot at first, but depending on your personal situation — for example, if you have family members you support or major financial responsibilities like a mortgage — a million-dollar policy might not be enough for you.
Here are some factors to consider when deciding how much coverage is right for you, and what to do if a million-dollar policy isn’t enough.
How to find out how much life insurance you need
Your age, income, financial responsibilities, and any existing life insurance you have all help determine how much coverage you need on your policy.
Age
Bottom line: The younger you are, the more life insurance coverage you might need.
Your age is typically a main factor for how much life insurance you need, as well as how much coverage you can qualify for. The younger you are, the more working years you have ahead of you, so if you were to pass away prematurely, your family would need a larger death benefit to replace your income and keep working toward other financial goals, like retirement.
For example, if you’re 40, you may want a life insurance policy worth 15 to 20 years of your salary. If you’re in your 50s, you may only need a policy worth 10 times your income or less, depending on your assets.
The younger you are, the higher the coverage amount an insurance company can approve you for based on your earning potential over the course of your career.
Income
Bottom line: A million-dollar policy might make sense if you earn between $65,000 and $105,000 per year (so your coverage is worth 10 to 15 times your income) but it depends on your financial situation.
Your life insurance coverage should be proportional to your income. When considering your life insurance coverage, a common rule of thumb is to multiply your annual salary by 10 to 15.
For instance, if you make $90,000, you may need between $900,000 and $1,350,000 in life insurance coverage, so a million-dollar policy may fit for your circumstances.
On the other hand, if you make $180,000, you might need closer to $1,800,000 at minimum, so a million-dollar policy may not be enough coverage for you.
Responsibilities & financial obligations
Bottom line: Calculate your debts, income, mortgage, and cost of your children’s education — if applicable.
Your individual financial responsibilities and expenses will also factor into how much coverage you need. Some people use a method called the DIME formula, which stands for Debts, Income, Mortgage, and Education.
This method involves calculating your outstanding debts, your income multiplied by the number of years you’d want to support your family, the amount left on your mortgage, and the cost of your child’s education in order to arrive at an estimate for coverage that represents your individual needs.
Learn more >> How to calculate how much life insurance you need
Existing life insurance coverage
Bottom line: Factor in any existing life insurance policies you have when calculating your coverage needs
You’ll also want to keep tabs on any existing life insurance policies you have in order to determine how much coverage you need. For example, if you have an existing policy worth $250,000 and you need a million dollars’ worth of coverage, you may only need a new policy worth $750,000.
However, it’s important to check when your existing coverage will expire to ensure you won’t have a gap in your coverage. Oftentimes, If you have life insurance through your job, you’ll lose that coverage if you change employers. Because of this, you’ll likely want to make sure you have enough life insurance independent of any policies through work.
Let’s take a look at an example: Jess, age 35, $80,000 annual income
Jess is 35 years old and earns $80,000 per year. She has a spouse and one child. Her and her spouse still owe $250,000 on their mortgage with 25 years left on it. Jess has $10,000 left on a car loan and $15,000 left on her student loans.
In this case, a million-dollar life insurance policy could be enough for Jess, depending on her existing assets. If she allotted roughly $800,000 to replace her income, $250,000 to cover the outstanding mortgage, and $25,000 she’d land at about $1,085,000 in coverage needs.
Let’s take a look at an example: Rick, age 50, $200,000 annual income
Rick is 50 years old and makes $200,000. He’s planning on working for another 10 years before he’ll consider retirement. He has a stay-at-home spouse, and he has two children he’s planning to send to college.
In this case, a million-dollar policy may not be enough for Rick. If he wants a policy that will maintain his family’s quality of life in the event he passes away unexpectedly, he may need closer to $2,000,000 in life insurance coverage (at least 10 times his income). Plus, if he wants to add extra coverage for his children’s education, he may need even more.
I didn’t qualify for a $1 million life insurance policy — what are my options?
Life insurance companies assess your insurance needs based on your income, assets, debts, and overall financial profile. If you don’t qualify for a million-dollar policy for financial reasons, a Policygenius expert can work with you to let you know how much coverage you can purchase within the insurer’s guidelines.
Each insurance company may have slightly different guidelines for determining how much coverage you can qualify for, so we can help you shop around to find the company that’ll be the best fit for your needs and your budget.
I need more than $1 million in coverage — what are my options?
If you need more than a million-dollar life insurance policy, you have plenty of options.
You can work directly with a Policygenius expert for tailored recommendations. For example:
You might want to consider a larger coverage amount — like a five-million- or 10-million-dollar policy.
You could also consider a combination of term life insurance and permanent life insurance policies to arrive at your total coverage amount.
