A million-dollar life insurance policy might sound like much more coverage than you need, but they're actually a smart idea for many families. Currently, most Americans have less coverage than they need.

Average Prices for $1 Million of Term Life Insurance Coverage

You can check out some average prices for a million-dollar policy in the chart below. The prices shown are for a male age 45 in good, but not perfect health.

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Is $1,000,000 if life insurance coverage enough?

According to the Insurance Information Institution, about only 60 percent of Americans had any kind of life insurance policies in 2018. Many of those policies were group insurance policies through an employer, which often don't have a benefit amount that is nearly enough to cover their family's needs. Plus, policies through employers can be lost if you leave your job for any reason.

So how much life insurance should you have? The formula for calculating how much life insurance you need is generally to assume you'll need about 10 times your current yearly income. However, there are several factors that can raise this amount. Expenses like mortgage payments, college tuition for your children, or debts can easily add up to the need for a million-dollar policy.

For example, let's say you make $65,000 a year. Using the standard rule, you could estimate that you'd need a $650,000 life insurance policy. However, let's say you still owe $100,000 on the mortgage for your home and have two children. The current average cost of four years of college is $122,000, so you'd want to want to set aside $122,000 for each of them. That's an additional $350,000 before accounting for other debts, medical bills, or funeral expenses. In this case, a million-dollar policy would be a good choice for your family.

The Insurance Information Institution reports that many people greatly overestimate the cost of life insurance. In fact, 44 percent of millennial survey respondents overestimated the cost of life insurance by 5 times the actual amount. Your cost will depend on several factors, like your term length, age, and overall health.

Factors that affect the cost of a million-dollar life insurance policy

There are several factors that could affect your cost if you decide that a million-dollar policy is right for your family. The first is the term length. Generally, you'll pay higher premiums the higher your term length is. Additionally, you might not be able to get a 30-year term for a high amount if you're an older applicant. For example, it can be much easier for a 30-year-old application to secure a million-dollar policy with a 30-year term than for a 55-year-old to secure the same policy.

Other factors are based on you and include:

• Your Age - Rates for policies increase as you age. It's much cheaper to secure a policy when you're young than it will be later on.
• Your height and weight - Life insurance companies give you prices depending on the rate class you qualify for. Your rate class is based on your health, so you'll pay much lower rates if you're in a preferred rate class. Your height and weight are one of the first factors insurance companies look at when assigning you a rate class.
• Your overall health - Your rate class takes your entire health picture into account. The insurance company will look at any health conditions you have or have had in the past, any medications you take, and your family health history when assigning your rate class.
• Your driving record and other risk factors - The insurance company will also look at your risk for accidental death. This will include looking at your driving record to see if you've been in multiple accidents or have speeding or other moving violations. The company will also ask if you have any high-risk hobbies, like skydiving.

The insurance company will assign you to a rate class based on these factors. While the names of rate classes might vary by the insurance company, the structure is the same. Life insurance rate classes include:

• Preferred Select - This is the highest rate class for applicants in the best health. You'll pay the lowest rates if you fall into this rate class. This class is generally reserved for people with no health conditions who are close to their ideal weight.
• Preferred - You'll also get great rates if you qualify for the preferred class. This class has a little more flexibility than the preferred select class. For example, you might get this class if you're overall healthy but have slightly elevated cholesterol or blood pressure.
• Standard Plus - This rate class is for people with well-controlled health conditions. For example, this might be your rate class if you're in overall good health and have well-controlled asthma.
• Standard - As the name implies, this class is for people in standard or average health. If you're managing a health condition, are overweight, or have elevated blood pressure or cholesterol readings, you'll likely get standard rates.
• Preferred tobacco - Active smokers are assigned different rates than nonsmokers. This is because smoking is always considered an increased mortality risk. You'll get the preferred tobacco rate if you're a smoker in otherwise good health.
• Standard tobacco - Smokers in average health are likely to be assigned this rate class.
• Substandard - You'll pay higher rates in this rate class if you're offered a policy at all. People who fall below an insurance company's qualifications for the standard rate class will be assigned this rate class. The company might offer you a policy at a higher rate or might deny your application altogether.

Choosing the right term length

The right term length for you depends on a few factors. You should consider your personal circumstances, including:

• How long you have until retirement
• How long you'll be making payments on your mortgage
• How long you have until your children are finished with their education
• How much debt you currently have
• How long any other financial responsibilities, such as taking care of an older family member, might last
• How much of a monthly premium you can afford

The right term for you should cover all these events while still fitting within your budget. Policies with longer-term lengths will cost more but will provide coverage for longer. So, while you shouldn't purchase more coverage than you can afford, it's also not a good idea to purchase coverage for less time than you'll need it.

It's a good idea to have a plan before you begin to apply for insurance. You should know what term length you need, how large you want your policy to be, and what premium you can afford before you begin shopping. This can help you know exactly what you're looking for and separate a good deal from a cheap price.

Income requirements for high coverage policies

Insurance companies will want to see that policy is reasonable for your income and circumstances. Generally, companies won't allow you to have a coverage amount that is very large in comparison to your income. While each company has its own underwriting rules, there is a general cap on the amount you can buy in relation to your income.

The cap decreases as you get older and closer to retirement. Most companies will cap someone who is 40 at 25 times their yearly income, but someone who is 60 will have a cap of only 10 times their yearly income. This is known as your insurability limit. So, if you're buying a million-dollar policy at 40, you'll need a yearly income of around $40,000 or more. This is done to prevent fraud. Insurance policies are meant to replace your family's income, not increase it.

You might be able to get a policy that is slightly above your limit if you can show the insurance company why you need it. For example, if you made $36,000 at 40 and wanted to take out a million-dollar policy, the insurance company might approve the policy if you can justify why you need the amount. You might need to provide additional financial information in order to secure your policy.

However, you won't be approved for policies that are well above your limit. You also won't be approved for a second policy that pushes you over your cap, even if both policies are under your limit. So, if you were 40 and made $40,000, you wouldn't be able to take out two million-dollar policies or even two $750,000 policies.

What about a million-dollar whole life policy?

A million-dollar whole life policy is possible but is often much more expensive. A million-dollar whole life policy often costs $800 a month or more, even if you purchase the policy young. By comparison, you might be able to get a million-dollar term policy for less than $100.

For most families, term is the better option. Term policies are significantly more affordable. You can set the term length that makes sense for you. If you still need a policy when your term length ends, you can start a new policy. You might be charged higher rates since you'll be older. However, since you'll have fewer financial obligations, you can take out a much smaller policy and keep your premiums affordable.

For example, let's say you take out a million-dollar, 20-year term policy when you're 40. The term expires when you're 60, but you'd still like coverage. You're planning to retire in five years, you own your house, and your children have finished their education. You probably don't still need a million-dollar policy at this point. You can take out a smaller amount, like $250,000. Your premiums will still go up, but it will likely be far less than whole life policy.

Can you get a $1 million policy without a medical exam?

Sometimes. It largely depends on the company. Many companies won't offer no exam policies of a million or more to applicants who are over 55. Even if you're under 55, you'll need to meet set qualifications to get a million-dollar no exam policy. The exact requirements will depend on the insurance company you're applying to.

The current COVID-19 pandemic has caused many companies, including major names like Mutual of Omaha, to increase the maximum amount you can get with accelerated underwriting. You'll need to be in perfect health to get through accelerated underwriting, however. So, most applicants will end up being required to take an exam.

Final Thoughts

For many families, a million-dollar term life policy is a smart investment. Premiums are often more affordable, especially considering the peace of mind that a million-dollar policy can provide. If you're considering buying a policy, you can use our free rates tool to get quotes from great companies today.