While the basics of life insurance are not as difficult, it is challenging for a lot of individuals to determine when and why to get it. Your untimely death can leave an ugly financial mess behind that would greatly frustrate your loved ones. A $5 million life insurance policy is not for everyone, but it is important to first ascertain whether it is important for you or not. 

Why You Need a 5 Million Dollar Life Insurance Policy

One of the hardest parts of buying a life insurance policy is determining how much coverage you need. Not a lot of people will need a 5 million dollar policy, it is too expensive for some individuals and might not be necessary for others. Usually, most $5 million life insurance policies are created for high-income earners. And while 5 million seems like a huge amount for your policy coverage, it might be just what you need for the following reasons. 

Estate Planning

Federal estate taxes can be a frustrating concern for your loved ones after your passing if not paid on time. The estate’s assets are used to pay for the tax debt and typically, the payment is required to be made within the first 9 months after the death. Life insurance policy proceeds are tax-free hence can be used by your beneficiaries to pay off estate taxes and secure assets.

Perhaps you have a business that you wish to leave behind for your family members. You should first decide who among the family members should run the business once you die and consider purchasing a life insurance policy to protect it. As such, the proceeds will be used as an alternative “cash-out” for the remaining heirs. By doing so, peace is maintained as well as the continuity of the business.

Releasing and distributing an estate plan to your loved ones when you die can be a long process. They may be forced to liquidate their assets or use money out-of-pocket to cover expenses such as estate taxes, funeral costs, and business debts. Fortunately, a life insurance policy provides a tax-free death benefit that can instead be used to make the payments.

Income Replacement

If you are the breadwinner of your family, have you thought of what will happen to them in the case of your demise? They will be left with a financial burden they cannot handle, but having a life insurance policy ensures that they have a reliable source of income replacement. Even when you are not around to financially support them, your loved ones will be protected from any financial hardship.

Credit cards, mortgage, insurance, higher education for your children, and car payments, etc, are just some of the expenses that your loved ones will need to pay for. A life insurance policy would be handy if it will be difficult or impossible for your family members to finance such expenses without your budget. This way, your family can comfortably support the kind of lifestyle they desire.

Create a Source of Savings

While not all life insurance policies can be used to create a source of savings, most permanent life insurance policies are perfect for such scenarios. Unlike temporary life insurance policies that only have a benefit, permanent policies provide both a death benefit and a savings component. This savings component is also referred to as the cash value component and is created from part of the premiums paid. 

When you pay your premiums, part of that amount makes up the cash value component. A lot of times, this cash value component can be borrowed against or even withdrawn when there is a need. It is a great source of income in times of emergency when you are left with no option. 

Assuming you don’t have other assets, you can use such a policy to create wealth for your loved ones. On the other hand, if you borrow against your policy meant to act as savings for your family, ensure to pay it back on time. This is because the unrepaid amount will be deducted from the death benefit before the policy is paid out to your beneficiaries. This is inconvenient if the purpose of the life insurance was meant to create a source of wealth.

When Should You Get it?

There is no specific age or time when you are supposed to buy a life insurance policy. However, a $5 million life insurance policy might be important depending on the stage of your life you are in. Life insurance policy needs will vary from one person to the next, based on the financial circumstances and family.  

To that end, below are instances when you will need to buy life insurance.

When You Have Dependants

This is one of the most common reasons for taking out a life insurance policy. When you have a spouse, children, or parents that depend on your current income, then you should consider buying a policy. And depending on their needs, the $5 million policy is going to financially protect them in your absence. These include child care expenses such as education and clothes as well as healthcare expenses for both your children and spouse. 

When You Have a Lot of Debt

When you die, the estates you leave behind will be used to pay off any pending debts. Co-signed debts shift the responsibility from you to the co-signer when you die leaving them with the burden of the loan you were supposed to pay back. Having a life insurance policy in place helps to ensure that the loans are paid off when you die leaving your estates intact, in the hands of your heirs. 

And not just co-signed loans alone, mortgage is another reason why you need to consider taking out a policy. In the event of your death, your loved ones are left with the burden of finishing off the unpaid mortgage or possibly losing the house to your creditors. A life insurance policy can be used as a collateral assignment where part of the death benefit is used to pay the remaining mortgage and the rest is paid out to the beneficiary.

When You Own a Business

A life insurance policy guarantees the survival of your business. It provides your beneficiaries with cash to dismantle the business or ensure its continuity by insuring a key employee of the company. Also, if you co-own a business, you will need to take out life insurance policies with your partners to enable you to buy out the absent partner’s part of the business in the event of untimely death. 

When You Want to Finance Your Burial Expenses

Funeral and burial expenses can be too much for your loved ones to handle. It is very costly but with a life insurance policy, your family members will be able to finance your burial after your demise. A $5 million policy might seem extravagant but given your loved ones’ income dependence on you plus the burial costs, it might not be as excessive as it looks.

You might not be eligible for a $5 million policy, and there are a lot of factors that will help you determine that. Let’s dive into the eligibility requirements for such a policy.

Eligibility Requirements

You have found a suitable life insurance policy for your needs and you are ready to purchase one. A few factors will determine the type of policy you qualify for, from the premiums to the amount of cover you are eligible for. Here is a quick rundown of these requirements.

Age

Life insurance is not just meant for older individuals as a lot of people believe. In fact, the best time to take out a policy is when you are young, preferably in your 20’s. This does not mean that people in their 30’s or above cannot buy life insurance. But to say, the younger you are, the better the premiums will be. And generally, larger policies come with high premiums so waiting until later will only increase the rates. 

The older you grow, the riskier to insure you get especially if you suffer health issues. Besides, a younger individual has more needs than an older individual. For instance, a 28-year-old has a large mortgage to pay or a young family that depends on them. On the other hand, chances are that the 65-year-old has children that depend on themselves and don’t need support. And if they are still paying for mortgage, it is likely in the final years.

Occupation and Income

Some careers limit the kind of life insurance policy someone would qualify for. For instance, a flight engineer might not qualify for some policies that a teacher would easily qualify for. 

Also, will you be able to afford to comfortably pay for your premiums? This is information that your insurer might need to confirm with you before approving your application. To qualify for a $5 million policy, you will need to have an income flow within a certain range: For obvious reasons, you will have to be a high-income earner.

Health

Health is also a determining factor of whether you are eligible for a life insurance policy or not. A lot of life insurance policies require you to undergo a medical examination before you can qualify. Some of the information needed during this medical exam might include your medical history, your family’s medical history, and your current medication and health. This helps to ascertain how risky you are to insure. 

Don’t be tempted to lie to your insurance company about your health because in case they find out that the information you gave them is incorrect then you are on the losing end. They might have your policy canceled or instead increase premiums, and in other case scenarios, fail to pay out the policy proceeds to your beneficiaries.

Other Life Insurance

This does not directly affect your eligibility for a life insurance policy, but it is something to consider before buying a policy. You might very well qualify for a $5 million policy, but if you already have another relatively large policy then it might be unnecessary. 

Determining the Right Term Length

After you establish the needs of having a life insurance policy, you also need to determine the right term length. This is easier to figure out especially after you know why you are buying a life insurance policy. For instance, a term life insurance policy would be perfect if you have a loan while a permanent policy would be great if you are building an inheritance for your children.  

$5 million is a huge figure, and it is going to come with high premiums. But as long as the coverage fits your needs and does not drain you financially as you pay for the premiums, then it shouldn’t be an issue. Also, just because you don’t currently have a business, debts or dependants does not mean you shouldn’t buy a life insurance policy. 

This is because the premiums you are eligible to pay right now will not be the same a few years to come because of age. Also, if these are things you are considering in the future, then you definitely should have a policy. You will pay lower premiums for the policy and because of better health, your application will be approved more easily.

Life insurance is easier said than done. There are a lot of factors to consider before choosing any policy, and there are tons of life insurance companies to choose from. If you are having a hard time deciding the best policy for you then reach out to an agent who understands the market. They will help you choose a befitting policy depending on your needs. Also, because of the wide array of insurers they represent, it will be easy to find the perfect one.

Bottom Line

If you currently have a steady income source, you might want to consider taking out a life insurance policy. If you have a family or intend to start one in the future, have estates you need to protect, or have a business but don’t have a policy, you will need to rethink your decisions. Given the benefits of a life insurance policy and the needs you have, it might be important to have one. Think of life insurance as a way of creating a financial safety net for your loved ones’ future, rather, avoiding future financial hardships for them after your demise.