Is $1000000 Life Insurance a Lot? Nope! In Fact, You May Need This Much Coverage

Who needs $1000000 life insurance?

How much does 1 Million dollar life insurance cost anyway?

Adequate coverage is so essential for you and your family. That’s why you must crunch the numbers to see what you need to keep your ship afloat.

The following information will surprise you, my friends, because these numbers aren’t so crazy! 

$1 Million Bucks is a lot of Dough! Or Is It?

Bam! $1000000 life insurance is a lot of coverage. Most of us don’t expect to see this figure in a lifetime, so it’s ridiculous to think anyone needs this much protection except the rich and famous.

…right?

Wrong! While $1000000 million in coverage isn’t necessary for everyone, I bet more of you need it than you know.

“The thing is life is expensive and it’s not getting any cheaper. While $1000000 seems like a lot of cash –  when you crunch the numbers it’s a lot less than you think.”

“The rule of thumb is that you should maintain between 6 – 10 times your annual wage in coverage to safely protect your family.”

Let’s Crunch Some Numbers in Real Time

The average salary in Canada is approximately $65,000 annually.

But let’s say you’re the primary breadwinner and make $100,000.00. To safely replace your income at the very low end, you should maintain at least $600,000 of coverage. This is according to the quick “rule of thumb” method having 6 – 10 times your salary in life insurance.

On the high end, you should maintain at least $1,000,000! 

Remember, if you’re 35 and making $100k annually, $1000000 of life insurance will replace your income for roughly ten years.

If you plan to work until age 65, you’ll earn at least $3 million in gross income. if you die prematurely, your household will never see that cash, so you must consider your lifestyle and financial obligations. Perhaps you need more than $1,000,000 of life insurance.

It’s All About Maintaining Your Lifestyle

Remember, you want to provide enough money for your family to continue living the lifestyle they have become accustomed to …

…without moving or having to sell the house.

One of the best parts about life insurance is that all policy proceeds are paid out 100% tax-free!

So now that you know you need to get life insurance, how much should you get and how long will the money last?

How Long Will Life Insurance Proceeds Last?

Kevin is 42, earns $100k annually, and has a $1 million, 20-year term Policy with RBC. He purchased this coverage when he was 37.

The premiums cost $64.62 per month.

If Kevin dies unexpectedly, how long will the policy proceeds last his wife Karen and their two small children?

Kevin’s net income (after tax) is approximately $71,000 based on average and marginal tax rates.

This is the amount of money Karen and the kids rely on to continue living their accustomed lifestyle. We’ll leave interest and inflation out of the equation to keep things simple.

$1,000,000 (Policy Proceeds) ÷ $71,000 (Annual Net Income) = 14.08 Years

 So Kevin’s life insurance proceeds will last Karen & kids for over 14 years!

NOTE* If Kevin’s family puts $1,000,000 in an annuity earning 5% interest, subject to 2% inflation, it pays out $5900 monthly. This is the equivalent of $71,000 net income for 23 years. Remember, the $676,000 of interest earned over 23 years is subject to taxes.

At the very least, Karen knows she can count on Kevin’s income for at least 14 years. Can you imagine the sense of security she feels?

She doesn’t have to rush to make any financially binding decisions while she’s emotionally devastated.  She may even decide to take a leave of absence from work. Either way, Karen can take her time grieving and be there to provide help and support for her kids.

Money’s coming in for the long term – guaranteed. Don’t get me wrong, she is not out of the woods financially.

She must be smart about what she decides to do, but there are more options and breathing room…

…and all of this costs $64.62 per month.

$1000000 Whole Life Insurance OR Term – What Should You Choose?

You may or may not know this, but there are two types of life insurance: term and permanent. These categories have numerous options, but this is the basic structure.

Term Life Insurance

Term life insurance is pure income protection. This is the drill:

• You select a policy face value such as $1,000,000 (lower and higher amounts are available) 
• Choose a term such as 30 years (you can dial this down depending on need) 
• Complete an life insurance application which may require a medical exam
• An underwriter assesses your circumstances and gives you a rating class that determines how much you spend on your premiums (majority of applicants receive standard ratings)

Consumers choose Term life insurance 90% of the time over permanent coverage.

Term life insurance is temporary pure cost insurance and is the most effective and affordable way to replace your income or protect your mortgage.

Whole Life Insurance

On the other hand, permanent life insurance (Whole Life ) protects you until the day you die and typically has a cash accumulation feature.

Whole life insurance is a great tool, but it’s far more costly because the insurance company knows they are going to be paying out a claim because you’re covered wether you die at age 40 or 95. Term on the other hand is temporary and protects families for a set period. If you survive the period – most consumers do – the policy simply expires.

I only recommend permanent products to those who have enough money to use them to their advantage.

Typically, these are higher income earners who have tax shelter requirements, those who have to care for people with special needs, businesspeople who have investments to protect or people who want to leave a gift for their grandchildren.

An exception to this rule is final expense life insurance.

A small whole-life policy works well for most people planning their end-of-life costs. It’s affordable and fits just about anyone’s budget and will remove the burden of funeral costs from your loved ones. 

How Much Does $1000000 of Whole Life Insurance Cost?

Whole life insurance is a real commitment, even more so if you purchase $1 million in coverage. If you happen to run into financial difficulties and cannot make your payments, you stand to lose a substantial investment.

Remember Kevin? For argument sake, if he had purchased a $1,000,000 whole life policy with Foresters at age 37, he would be paying would be paying $683.10 per month. This is ten times what he is currently paying for his Term policy.

You can see how this could be a problem; many people opt out before their beneficiaries see a dime. It’s one of the many reasons I think the term works better for most people. 

However, there are situations when whole life works well for people. If you have a substantial estate, you may want to look closer at this product. 

Creative Tools for High-Value Life Insurance Policies

As you can see, $1000000 in whole life insurance will cost you a bomb and is utterly unaffordable if you don’t have cash flow to cover the premiums.

This is why term life insurance is such a gem. You can protect your family for very little money during your most vulnerable years.

But if you have a chunk of change, a permanent policy can maximize your estate. Check out some of these money-saving strategies:

1. Immediate Financing Arrangement (IFA) To Leverage Cash In Your Business

Whole life insurance policies are costly. So, it’s not a surprise when people who have extra cash in their corporation are reluctant to tie it up in paying life insurance premiums.

Well, there is a solution. You can use a premium financing strategy known as an Immediate Financing Arrangement (IFA).

How does it work? You dump a large chunk of money from your business into a cash-value life insurance policy.

Your policy is linked to a line of credit from a Canadian bank or life insurance company. Using your policy as collateral, you can borrow up to 90% of the funds and use them to operate or invest in your business.

The best part?

You get a tax deduction on the life insurance premiums and the interest paid on the line of credit. Since you’re not taking money out of your policy, the investment account continues to grow, as does the borrowing cap on your line of credit.

If you’re looking for tax strategies, this approach is beneficial

Instead of liquidating assets, you leverage your wealth to purchase a policy that would otherwise be unaffordable – potentially offsetting capital gains, gift taxes, and estate taxes…

…that is, if you use this tool correctly.

Buyer beware. These loans are often variable, so will your payments if interest rates skyrocket.

If you cannot weather the storm, lenders may pursue your assets. There is light at the end of the tunnel, though.

You can purchase a term insurance rider that enables you to increase your death benefits to cover increases in the loan balance. 

“This is a complicated approach and you should consult a trusted financial advisor before embarking on this path.”

2. Pay Your Premiums Annually and Over a Shorter Period (8, 10, 20 Years)

Financing your premiums annually and paying the policy up in the shortest period contributes to much higher growth in your policy’s investment account. 

The quicker you get the money in, the sooner it starts compounding and earning interest and dividends. For example, say you have a $1 million, 20-pay, whole-life policy. By year 25, paying annually could easily result in a 5-12% increase in cash values.

*NOTE: obviously, this is subject to the performance of the participating investment fund of the policy

2. An Insured Retirement Plan (IRP)

Another tool people use with liquid funds is an Insured Retirement Plan (IRP).

This is similar to an immediate financing arrangement in that you borrow money from your life insurance policy.

The difference? Instead of using it for business purposes, you’re using it to help supplement your retirement income.

You’re also building up the investment account in your policy over an extended period to enjoy longer-term compounding and growth. It doesn’t offer the same tax deductions when it’s personally owned, but it does offer tax-deferred or even tax-free growth depending on how the proceeds are disbursed.

Everything is a Little Easier When You Have Cash 

This strategy is for high-net-worth individuals who have exhausted traditional retirement vehicles such as RRSPs, TSFAs, and unregistered investment accounts.

During high-income years, you dump excess cash into a whole or Universal life insurance policy. Over time, the policy’s investment account experiences substantial compounding and growth.

Upon retirement, instead of withdrawing cash directly from the insurance policy, you borrow money through a line of credit attached to the policy. This LOC is usually affiliated with a Canadian bank or life insurance company. No income tax is triggered because loans are NOT taxable under CRA rules. 

You’re eligible to borrow up to 90% of the cash value in your policy, and the LOC can be capitalized so you make no payments while you’re alive.

Because you’re not taking money directly out of the policy, its investment account remains intact and continues to grow. This can increase the amount of cash you can borrow from the LOC. 

Life insurance proceeds pay off the loan balance and any interest owing when you die. Any funds left over are paid directly to your beneficiaries, tax-free, bypassing probate. 

If you want to learn more about whether permanent coverage is right for you, check out my post on Cash Value Life Insurance.

Call Policy Architects Today; We Can Help! 

So, I guess the question is, “Do YOU need $1000000 life insurance?” 

It’s entirely possible. If you make over $60,000 per year and have a mortgage, credit card debt, and dependents, that $1000000 in life insurance is a must.

Sure it sounds like a lot of money but when you crunch the numbers you see that cash evaporates when someone dies….

….and thankfully, for the most part, term life insurance is sufficient!

So why don’t you call Policy Architects today so we can discuss your needs and find the best possible solution for you?