Everyday finances

How much does a million dollars cost?

How much does a million dollars cost?

More precisely, how much does a million-dollar life insurance policy cost? You may be surprised. It may also surprise you to find that a million dollars is not as much as you thought when it comes to maintaining quality of life for your loved ones.

A million dollars! It seems like a fortune. But in terms of life insurance, it might be just barely enough to maintain your children’s standard of living until they are old enough to provide for themselves. Why? Because, while our income has increased over time, the same may not hold true for the returns on our investments.

Let’s take a closer look.

Objective: replacement income

People sometimes forget this, but the primary purpose of life insurance is to provide survivors with replacement income in the event of the death of one of the people ensuring their standard of living (usually the parents). The insurance policy basically releases capital that, having been invested in securities, will generate income over a number of years.

Take, for example, a middle-class family with two children, where one of the parents earns $70,000 a year. The rule of thumb is to generate about 70% of that income to maintain the family’s quality of life, if either parent were to die prematurely. Suppose the goal is to guarantee survivors an annual income of about $50,000. How much life insurance should the person buy?

You’ve probably guessed already.

How much life insurance?

Two sides of the coin

As you can see, the low interest rates that have been making home-buyers so happy in recent years also mean things have changed when it comes to investing with a view to providing a fixed income. A growing number of parents may therefore want to consider increasing their life insurance coverage.

Happily, that coverage – including that million-dollar amount – also no longer costs what it used to cost.

Surprisingly affordable protection

A quick glance at current rates among the main insurance companies in Canada shows that the market has changed to the buyer’s advantage. See for yourself:

How much does a million dollars cost?

It could therefore cost a woman with children barely $35 a month to, in the event of her death, help her family maintain their standard of living until the children become independent.

Of course, any financial services professional will remind clients that, with 10-year term insurance, the cost will go up considerably after the tenth year. The role of the financial services professional at that point is to reassess the need, which may be reduced, since the children will now be older and closer to financial independence. At the same time, other needs may have arisen, and some of the insurance may be allocated to cover them. Finally, it may be deemed advisable to maintain all or part of the insurance to build wealth for the children, and thus even out the premiums over the person’s lifetime.

A million dollars may not be as much as it once was, but it can still be a good place to start when working towards financial security.