As you progress in your professional career, you may find that you have the opportunity to build your net worth. Between promotions and pay raises, you might be focused on how to best allocate funds as your net worth increases. Once you hit certain financial milestones, it’s wise to reevaluate recurring costs and either add or remove services you need. 

When you are in your 30s, certain life events such as marriage, having children, or buying a home may prompt you to evaluate your insurance coverages needed. If you have a net worth of over 1 million dollars, you may have a unique set of needs. 

This is especially true when it comes to determining life insurance coverage and whether or not it’s necessary. When researching insurance types, it’s helpful to understand the basics as well as the pros and cons of securing coverage. Keep these considerations in mind when deciding whether or not you want to purchase a term life insurance policy.

What is term life insurance?

First, it’s important to understand term life insurance and how it differs from other types of life insurance options. Term life insurance is a contractual agreement that guarantees payment to your chosen beneficiaries in the event of your death in exchange for a monthly premium. With this type of policy, you determine the coverage term, such as 20 or 30 years. If you were to pass away during this time, your beneficiaries receive a “death benefit.”

If you outlive the term of your policy, however, your coverage expires. Term life insurance differs from other permanent types of life insurance because there isn’t an added cash value component. For example, with whole life insurance, you can use the policy as an investment vehicle as well. Moreover, whole life insurance is guaranteed for your entire life as long as you continue to make payments. 

Because term insurance expires after a set amount of time and there’s no cash value, the premium payments are cheaper. You can start by getting an insurance quote from different carriers to determine the best avenue for your situation. As a high net worth individual, you have a unique set of circumstances so consult with the insurance company first.

How is my premium payment calculated?

When you decide to secure term life insurance, there are certain steps that you must take before the coverage begins. Here are a few factors that are taken into consideration when determining your rate:

• Total amount of coverage
• Term length
• Demographics
• Health status 

When you first inquire about a policy you will fill out an application asking a series of general questions. You will also need to sign paperwork to release your medical records to the carrier. A portion of your rate is calculated based on the statistical risk you pose to the carrier. This is why they will request medical information. 

After your initial application is received, you will be required to take a medical exam. During your medical exam, the insurance carrier will be most interested in understanding these particular variables:

• Height
• Weight
• Prescription use
• Family medical history
• Medical conditions
• Blood pressure
• Urine sample analysis
• Blood draw findings

After the medical exam, the carrier will also research factors such as your credit report, past prescriptions, and driving record. If you are securing a high amount of coverage, the carrier may also ask to see financial statements.  

How much life insurance do I need?

The amount of life insurance you need can significantly vary depending on numerous factors. The guidance for determining the amount of coverage you need is to multiply your annual salary by ten. This is a general rule of thumb but would provide enough coverage for your family in most situations. 

If you’re a high net worth individual with a high salary, you might have other factors to consider. For example, certain carriers have a death benefit limit so it might not make sense to secure coverage through this insurance company. This is why it is important to look for carriers that will provide a death benefit with adequate coverage amounts. 

Who needs term life insurance?

Term life insurance is commonly secured when individuals start to accrue assets or share obligations with someone else. For example, couples may obtain a term life insurance policy if they are combining some or all of their finances. 

Furthermore, new parents may purchase term life insurance to provide coverage for dependents until they are out of the house. First-time homebuyers also are good candidates for term life insurance to protect their new asset. 

Term life insurance is beneficial when you share expenses, provide for other family members or want to leave a legacy. If you have a high net worth, you may have a high salary or owe very little on existing obligations. Moreover, if you own your assets outright, you may wonder if you even need term life insurance. 

In this instance, it’s always best to speak with a professional that can help you during your insurance search. However, there are a few reasons why you might still need term life insurance as a high net worth individual.

Benefits of term life insurance if I am in my 30s and have a high net worth: 

If you are in your 30s, you might be experiencing a change in both your career and personal life. For example, you might still be switching careers or certain life circumstances are changing like getting married or having children. Remember that life can be unexpected and throw unexpected curveballs your way. If your situation could change, it’s important to have safeguards set up to protect your loved ones. 

Additionally, you might consider purchasing life insurance for taxation purposes. Estate planning is a common reason to look into term life insurance. If you want to leave a legacy for your loved ones and are worried about estate taxes, you may consider a term life insurance policy. If you have an estate of 11.58 million or over, your loved ones will be subjected to an estate tax. The federal estate tax ranges based on brackets but maxes out at 40%.

This is why you may look into policies with a death benefit large enough to cover your projected estate tax. Remember that life insurance proceeds are tax-free, making this a common reason to secure a policy. This allows you to leave a legacy to your loved ones without being subjected to a large tax bill. 

Additionally, even though you have a high net worth, that does not always mean that your debts are paid off. While you may have a high net worth, it’s possible that you may have higher debts and bills to pay. 

To calculate your net worth, add up the value of your owned assets such as stocks, homes, and cars. You will then subtract any debts from this amount to determine your overall net worth. Some debts to include in this calculation are mortgages, credit card debt, or vehicle loans.  

For example, if you have a net worth of $4 million but your debts total $2 million, your loved ones would need to continue paying for these obligations. This is why it’s beneficial to secure a term life insurance policy while you work towards paying these off. 

Thinking about your loved ones

When your loved ones depend on your salary to meet monthly obligations, it’s also worth looking into a policy. Remember that if you were to pass away, your loved ones lose your salary and income potential. While you might not have trouble paying for your current obligations, if you were to pass, your loved ones might be unable to. In this instance, you will want to look into term life insurance options. 

While your family could potentially sell assets to pay for remaining debts, they may have to do so at a lower cost than they are worth. Unfortunately, liquidating assets to pay for debt usually results in financial loss. Having a cushion in place provides your family with time to plan how to best allocate your assets. 

If you have young children or plan to have children, you may need term life insurance for college planning purposes. The average cost of private college for the 2020-2021 school year is $37,650 and continues to increase. Over the course of four years, this can substantially eat into your budget, especially if you have multiple children. 

Conclusion

While you may have a net worth of over $1 million, this is still a large financial undertaking if you’re unprepared. This is why you may consider securing term life coverage just to account for future tuition costs. 

Lastly, you may consider securing a term life policy if you are a business owner. If you own businesses or have business interests, having coverage in place is important. If you have business debts or if you used family assets for your business, you will want to consider coverage. 

While your dependents might not actively participate in your operations, they might still have a financial stake if you passed. Term life insurance can protect your family from paying off these business debts.

When you have a high net worth you may question, “why should I buy life insurance?” When working hard to secure a high net worth, it may seem like an added unnecessary cost. Being financially diligent is most likely part of why you have a high net worth in the first place. Remember that there are circumstances when it makes sense to have term life insurance, even if you feel financially secure. When planning, take into consideration your current and future needs to make the best decision for yourself and your family.