What is the minimum coverage amount for life insurance?

You may be interested in purchasing the smallest life insurance policy possible for several reasons, ranging from cost to immediate coverage needs. The minimum term life insurance policy you can purchase is typically $100,000, though some companies offer policies of as low as $25,000 to $50,000.

Read more: How much does a $100,000 life insurance policy cost?

The cost of a $500,000 life insurance policy can vary depending on several factors, including the insured person’s age, health condition, lifestyle, and the type of policy (e.g., term life or whole life). On average, for a healthy individual, a 20-year term life insurance policy with a $500,000 coverage might cost around $20 to $50 per month.

However, it’s essential to get personalized quotes from insurance providers to get an accurate estimate.

Before you get a term life insurance quote and immediately purchase a policy, it’s important to explore other options and weigh the pros and cons of policies with low minimums.

Read More: What Does A $500,000 Life Insurance Policy Cost?

Minimum Life Insurance Coverage Amount

So, what is the lowest life insurance policy amount you can get? For most term life insurance companies, the smallest life insurance policy offered is for $100,000 in coverage. However, some companies, such as Genworth Life Insurance Company and AIG American General Life Insurance, offer term coverage in the amount of $50,000 or even $25,000. See our Genworth life insurance review and AIG life insurance review to read more.

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Reasons to Get the Smallest Life Insurance Policy

For many people, there is little benefit to purchasing the term life insurance policy minimum. After all, per the experts, you should carry enough insurance for your family to pay off your debts (plus interest), replace your income, and offset the impacts of inflation. However, a few good reasons exist to purchase minimal life insurance coverage.

One of the biggest benefits of purchasing a small policy is that benefits become active almost immediately. These types of small life insurance policies are commonly referred to as simplified issue term or instant issue term.

Not only do these small policies become active instantly, but you can apply for them online or over the phone. They are no medical exam term life insurance so you also don’t need to undergo a medical exam to purchase one. The insurer will approve or decline your application on the spot based on your self-reported answers.

Read more: What is an instant life insurance policy?

Not-So-Good Reasons To Purchase a Small Life Insurance Policy

Many people mistakenly assume that the smaller coverage they buy, the lower their rates will be. The truth is that buying life insurance is a lot like buying grocery items in bulk: the cost goes down the more you purchase.

Term life insurance companies sell life insurance “by the unit.” Each unit of coverage is worth $1,000. For a policy of $1 million or more, you’re looking at paying around $0.37 per unit. However, for a policy of between $100,000 and $500,000, you can expect to pay as much as $0.12 more per unit, at $0.49 per unit.

For a policy lower than these standard minimums, you’re looking at paying significantly more per unit. At some point, you must ask yourself, is it worth it to buy the smallest life insurance policy, or should you stick with the typical minimum?

Understanding Life Insurance Coverage Amounts Available

Before you address the question of how much term life insurance can you buy, it is important to first know how much life insurance you qualify for. Many people assume that the only qualifying criteria underwriters consider before issuing life insurance policies are the applicant’s age and health. The truth is that underwriters must also factor in the applicant’s income.

Aside from ensuring that you can afford coverage, the number-one reason underwriters consider applicants’ income is because insurance companies need to prevent excess coverage situations. In other words, the life insurance company wants to avoid paying out amounts that exceed the beneficiaries’ economic losses. This is, in large part, how they protect themselves financially.

How much life insurance can you purchase based on your income? Though the answer varies from insurance company to insurance company, most only allow applicants to purchase coverage up to 25 times their annual income. If you make $40,000 a year, the maximum amount of coverage you can receive is $750,000. If you make $150,000 per year, your max coverage amount is $3,750,000.

If you try to purchase a larger policy, the underwriter will require not only a medical exam but also proof of income and employment. Types of documents the underwriter may require include the following:

• Pay stubs
• W-2
• Tax returns
• Financial questionnaire

One of the easiest ways to establish proof of employment and income is to have your employer pay your life insurance premiums on your behalf out of your paychecks.

How to Determine the Right Minimum Life Insurance Policy for You

Once you determine how much coverage you can afford, you must then consider how much you actually need. The amount of coverage you need depends largely on your needs, amount of debt, and wishes for your family once you are no longer around to support them. You can use a term life insurance calculator to help you figure out how much life insurance you need.

Income replacement is one factor that experts urge you to give considerable weight to. At a minimum, your policy should cover between 10 to 15 times your annual income, though these numbers may be higher or lower depending on your age when you purchase the policy.

Next, consider your debt load. Do you have remaining mortgage payments? Considerable student debt? Auto loans? Your policy should be enough to pay off this debt, plus interest, and still cover your lost income.

Finally, consider funeral and burial expenses and other end-of-life care costs and statistics. The World Population Review reports that funerals cost between $7,000 and $9,000, with the median cost being $7,360. Some states, such as New York, California, and Hawaii, have average funeral costs that range from $10,700 to nearly $15,000.

Read more: How much do funerals cost?

These figures do not account for end-of-life costs, which range from $11,825 in Mississippi to as much as $26,492 in Hawaii. The average total cost of death is $22,490 but can soar as high as $41,467.

If you give weight to each of these factors, you will almost certainly want to purchase something greater than the smallest life insurance policy available. There are also different types of term life insurance that can affect coverage and price.

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Case Studies: Minimum Life Insurance Coverage Amount

Case Study 1: Sarah’s Immediate Coverage

Sarah, a young professional with no dependents, wanted immediate life insurance coverage. She opted for a small policy with a coverage amount of $25,000. Since she didn’t have substantial financial obligations, the minimum coverage provided her with the desired immediate protection without the need for a lengthy application process.

Case Study 2: Jack’s Basic Coverage

Jack, a retiree with grown children and minimal debt, was looking for a basic life insurance policy to cover his funeral and burial expenses. He chose a policy with a coverage amount of $50,000, which was sufficient to meet his end-of-life needs without burdening him with high premiums.

Case Study 3: Emma’s Additional Security

Emma, a young parent with a mortgage and young children, recognized the importance of securing her family’s financial future. She opted for a policy with a coverage amount of $100,000 to ensure that her family would be protected and her outstanding debts would be covered in the event of her untimely death.

More About Minimum Life Insurance Coverage

There are some instances in which you may be better served by a smaller life insurance policy, such as if you need immediate coverage without going through a bunch of hoops. However, for most people, it makes more financial and practical sense to purchase life insurance policies with larger coverage amounts.

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