$1000000 of Whole Life Insurance or Term? OUCH!
Who needs $1000000 of whole life insurance? Or, what about a million bucks of term?
How much does 1 Million dollar life insurance cost anyway?
Adequate coverage is so important for you and your family. That’s why you need to crunch the numbers to see what you REALLY need to keep your ship afloat.
I think the following information is going to surprise you, my friends, because these numbers aren’t so crazy after all!
$1000000 of Whole Life...or Term: $1 Million Bucks is a lot of Dough!
Bam! $1000000 of whole life insurance…or term is a LOT of coverage. This a figure most of us don’t expect to see in a lifetime so it’s ridiculous to think anyone needs this sort of coverage except the rich and famous…
Wrong! While $1000000 million in coverage isn’t necessary for everyone, my bet is 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
If you live in Toronto, right now the average salary is $60,000 per year.
But let’s say you’re the primary breadwinner and make $100,000.00. In order to safely replace your income at the low end, you should maintain at least $600,000 of coverage.
On the high end, you should maintain $1,000,000!
Remember, if you’re 35 years old, making $100k annually, $1000000 of whole life insurance replaces your income for roughly 10 years.
Think about it, if you are planning to work to age 65, that’s $3 million of income. Your family will never see that cash so you have to take all your lifestyle and financial obligations into consideration.
That figure goes up quickly depending on your circumstances. This is why I do a needs analysis to show my clients where they REALLY stand.
It's All About Maintaining Your Lifestyle
Remember, you want to provide enough money for your family to continue to live the lifestyle they have become accustomed to…
…without having to sell the house.
One of the best parts about life insurance is the claim is paid out tax-free.
So let’s take a look at an example for better understanding:
How Long Will My Life Insurance Proceeds Last?
$500,000 of Life Insurance
Kevin is 42 and earns $100k annually. He has a $500,000, 20-year term life insurance policy with Empire Life. He bought the policy when he was 37 and his monthly cost is $40.50.
If Kevin dies unexpectedly, how long will his life insurance proceeds last his wife Karen and their two small children?
For this example, based on average and marginal tax rates, Kevin’s net income (after tax) is approximately $71,000.
This is the amount of money his family needs to continue living the same lifestyle they are accustomed to. For simplicity’s sake, we’ll leave interest and inflation out of the equation.
(Annual Net Income)
Kevin's family uses up his life insurance proceeds in just over 7 years!
“NOTE* If Kevin’s family put the $500,000 in an annuity earning 5% interest, subject to 2% inflation, it would pay out $5900 monthly. The equivalent of $71,000 net income for 8.7 years. Remember the $115,000 of interest earned over the 8 years is subject to taxes.”
Come ON! That's Not Bad!
I know what you’re thinking. That’s pretty good, 7 years of cash to keep the family going – better than 5 years, 2 years or nothing!
True, some life insurance is better than nothing, but what happens when the money runs out after 7 or even 8 years?
Will Karen, a stay-at-home mom, have the time to get a job or go back to school to upgrade her skills so she can earn the money to replace Kevin’s income…
…all the while taking care of her family?
What happens when the children reach the age where they go to University or College?
Will Karen have the money to help them out or will they struggle with student debt? Will she be able to keep up with inflation and the rising cost of food, clothing and health care? Questions abound.
Some of you may be thinking - don't touch the principal!
Ok, let’s say Karen invests the $500,000 and tries to live off the interest so she can keep the principal intact for her children’s legacy.
Smart idea. In reality, even if she earns 6% on the $500,000 after inflation, that amounts to approximately $30,000 annually…
…or $25,000 net after income tax.
We can all agree it’s almost impossible for her to make that leap without dipping into the principal and eroding the money she earmarked her kid’s future.
Even if she was able to get a job right away and cobble together a $60K or $70k net income, she has to hire someone to help her out with childcare. We all know how expensive that can be.
The sad thing is it would have only cost Kevin $30-35 more per month to have $1 million of coverage vs $500,000.
Ok, let’s try this again.
$1,000,000 of Life Insurance
Kevin is 42, earns $100k annually and has a $1 million of 20 year term. He purchased this coverage when he was 37 years old.
The premiums cost $72.90 per month.
If Kevin dies unexpectedly, how long will the policy proceeds last his wife Karen and their two small children?
As in the previous example, based on average and marginal tax rates, Kevin’s net income (after tax) is approximately $71,000.
This is the amount of money Karen and the kids need to continue living the lifestyle they are accustomed to. To keep things simple, we’ll leave interest and inflation out of the equation.
(Annual Net Income)
Kevin's life insurance proceeds will last Karen & kids for over 14 years!
NOTE* If Kevin's family put the $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.
It's Amazing the Difference $32.40 a month can make!
This is a different reality altogether!
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 out and get a job or make any financially binding decisions while she’s emotionally devastated. 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 cost $32.70 more per month.
People's Financial Reality is Quite Shocking
One thing that never ceases to amaze me is the general lack of awareness of the cost of living. Houses are increasingly expensive, and families take on record debt in Canada to sustain their way of life.
“Two trillion dollars of debt is a big number. Let us try to put some context around it. A common way to measure household debt is to compare it with the amount of disposable income people have.”
“In Canada’s case, household debt is around 170 per cent of disposable income. In other words, the average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes.”
“That ratio is a Canadian record, and up from about 100 per cent 20 years ago.”
Now this is a hard pill to swallow but it’s a reality.
So, when I sit down with couples to discuss their plan, more often than not they’re quite shocked to see that $500K policy they are eyeing is woefully inadequate to provide the protection they envision.
This is where I feel really good about the contribution I make.
$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. Within these categories, there are 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)
- Get a physical
- An underwriter assesses your circumstances and gives you a rating that determines how much you spend on your premiums
At Policy Architects we love term! This is because it’s flexible and super affordable. Especially if you buy it when you’re young and healthy. In my experience as a life insurance agent, term works best for most people most of the time.
Whole Life Insurance
On the other hand, permanent life insurance (Univeral and Whole Life are permanent products) protects you until the day you die and typically has a cash accumulation feature.
The process is the same as term UNLESS you choose a guaranteed issue or a no medical exam policy.
Whole life insurance is a great tool, but it’s far more costly because the payout is guaranteed as long as you pay your premiums in a timely manner.
I only recommend permanent products to those who have enough money to use them to their advantage.
Typically, these are people with estates who have tax shelter requirements, those who have to care for people with special needs or businesspeople who have investments to protect.
If you want to learn more about whether permanent coverage is right for you, check out my post on Cash Value Life Insurance.
Final Expense Insurance
An exception to the rule is final expense life insurance.
This sort of whole life policy works a charm for people planning their end of life costs. It’s affordable and fits just about anyone’s budget.
My personal opinion is – life insurance isn’t an “investment” per se. If you’re looking for a good return on your savings there are better places than life insurance to park your money.
But that’s just my take on things. There are others that disagree.
$1000000 of Whole Life Insurance Rates
Whole life insurance is a real commitment and even more so if you purchase $1 Million in coverage. If you happen to fall off the wagon you lose a substantial investment.
Actually, this is a real problem as many people opt out before their beneficiaries see a dime. It’s one of the many reasons I think term works better for most people, most of the time.
There are however situations when whole life works well for people. If you have a substantial estate, you may want to take a closer look at this product.
To give you an idea of how much a whole life policy costs in terms of monthly premiums, I’m sharing some rates. As you can see this is a huge financial commitment.
Rates below are for Foresters Life, Non Par Whole Life Pay to 100 (NT)
Standard Health Class, Non-Smoker 2022
35 Year Old Male
35 Year Old Female
40 Year Old Male
40 Year Old Female
45 Year Old Male
45 Year Old Female
50 Year Old Male
50 Year Old Female
55 Year Old Male
55 Year Old Female
60 Year Old Male
60 Year Old Female
65 Year Old Male
65 Year Old Female
When You're Looking At Buying $1000000 of Whole Life Insurance,
Your Health & Age Matter
When you’re young and healthy term life insurance is super affordable.
But what happens if you get sick…
How much is a 1 Million Dollar Life Insurance Policy if you have medical issues?
Underwriters are the people who assess the risk a life insurance company takes on when they offer you coverage.
For obvious reasons the older you are the more you pay for coverage. This is because you’re closer to death and run a greater risk of dying during the term – which means they may have to payout.
To give you a little more insight into this let’s look at a potential client.
Our first example is a woman. She’s in terrific shape but unfortunately, she put off buying a life insurance policy until later in life.
She made a great deal of money in her hay day and didn’t think it was necessary. The thing is she quit that peach of a job and just launched her own company.
While her mortgage is paid up, she took on a ton of debt to start her business. She has partners and feels she needs $1000000 in coverage to protect them and her employees.
Our client is 52 and is looking for a 30 year term. She opts for Sun Life because they offer her coverage at $370.35 per month.
Wow, quite a difference from our 32-year-old doctor. The thing is she is covered until she is 82 which is great.
How Much Does 1 Million Dollar Term Life Insurance Cost?
If you are wondering – $1 million of term life insurance costs, I have some answers.
As I mentioned above, term life insurance is very affordable. If you make over $100K per year, then this is a very realistic amount of protection.
To get an idea of how affordable it really is, let’s start with a young, healthy male that’s planning to have a family.
Our client just graduated from medical school and is purchasing a house and has a $700,000.00 mortgage. He’s 32 years old and currently makes about $110,000.
From the numbers, you can see this client needs $1000000 or more in coverage. Thankfully he’s young and healthy and receives a preferred rating. How much are his premiums?
I urge him to take a 30-year term because once he’s locked in his family is protected until he is 62 years old. This means all the most vulnerable periods in his life are covered at an incredibly fair rate.
BMO offers a monthly payment of $87.75 per month! Wow, now that’s fabulous. The best part is, even if he gets sick his premiums remain the same.
...Let's Look at Someone a Little Younger with a Controlled Condition!
For this example, I’m using a younger person. I have a 38-year-old woman who has controlled high blood pressure.
She’s in average shape and is worried about getting rated. Thankfully my client receives a standard rating from Empire Life. Hey, she works with Policy Architects!
As a lawyer she makes a pretty penny, has a $500K mortgage and a couple of kids to take care of.
Our client chooses $1000000 of protection to assure her family can maintain the lifestyle they are accustomed to. Premiums are $118.80 per month.
If she was in exceptional health and got a preferred plus rating, she pays $90.90 per month. Thats a $10,044 savings over a 30-year term because of her preferred rating!
What if our client smokes? Well then, her premiums skyrocket! Empire charges her $270.90 per month! That’s $54,756 MORE over the course of her term.
This is because smoking is very bad for your health and underwriters know this.
Creative Tools for High Value Life Insurance Policies
As you can see $1000000 in whole life insurance is going to cost you a bomb and is completely unaffordable if you don't have an estate to support the premiums.
This is why term life insurance is such a gem. You can protect your family during your must vulnerable years for very little money.
...but if you do happen to have a chunk of change a permanent policy can really 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 VERY expensive. So, it’s not a surprise when people who have extra cash in their corporation are reluctant to tie it up 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? Basically, you dump a big 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’re allowed to borrow up to 90% of the funds back and use them to operate or invest in your business.
The best part?
You get a tax deduction on the life insurance premiums and on the interest paid on the line of credit. Since you’re not actually 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 very useful
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 properly.
Buyer beware. These loans are often variable which means if interest rates skyrocket so will your payments.
Sadly, if you’re unable to weather the storm the lenders may go after your personal 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 Time Period (8, 10, 20 Years)
Financing your premiums annually and paying the policy up in the shortest period of time contributes to much higher growth in the investment account of your policy.
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 subject to the performance of the participating investment fund of the policy
3. An Insured Retirement Plan (IRP)
Another tool that is used by people with liquid funds is an Insured Retirement Plan (IRP).
This is similar to an immediate financing arrangement in that you are borrowing 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 of time 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 is a strategy for high-net-worth individuals who have exhausted traditional retirement vehicles such as RRSP’s, TSFA’s and unregistered investment accounts.
During high-income years, you dump excess cash into a whole or Universal life insurance policy. Over time the investment account in the policy 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. Because loans are NOT taxable under CRA rules, no income tax is triggered.
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 at all 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 result in an increase in the amount of cash you’re eligible to borrow from the LOC.
When you die, your life insurance proceeds are used to pay off the loan balance and any interest owing. Any funds left over are paid directly to your beneficiaries, tax-free, bypassing probate.
Call Policy Architects Today, We Can Help!
So, I guess the question comes down to, “Do YOU Need $1000000 Whole Life Insurance…or term?”.
It’s quite possible. If you make more than $60,000 per year, 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 give Policy Architects a call today so we can go through your needs to find the best possible solution for YOU!