I get it – thinking about the time when you’re no longer around isn’t something you’re excited about doing.
It’s daunting, depressing, and, quite frankly, difficult to imagine.
But there are times when you have to. For example, when debating whether or not to get life insurance.
Is Life Insurance Worth It?
I often get asked whether you need life insurance at all at this age – and why. Some millennials find it hard to believe that insurance is necessary – and think it’s just a waste of their hard-earned cash.
But my answer is always the same. Not having it is a risk no-one should take, no matter how young and healthy you are.
In this post, I’ll explain why not having life insurance is a huge mistake many people make – and why you should think twice before you say no to it.
What Is Life Insurance?
In short, life insurance is a policy designed to minimize the financial strain that your death would have on your family. It’s there to provide peace of mind to you and protect your loved ones in case anything happens to you.
While there are many types of life insurance policies, most will pay out cash to your family if you die while covered by the policy. You’ll be the one to choose how much you want your family to get, and the length of your life cover.
Why Do Millennials Need Life Insurance?
It’s not surprising that when you’re young and ambitious, taking care of the financial situation without you in the picture doesn’t seem like a priority.
Heck, even saving for retirement at this age isn’t something many people do (even though they should!) – so how can you expect anyone in their 20s or early 30s to sit there and think about the day they die!
But if you can think of at least one person who would be financially worse off if you died – be it your parent, your partner or someone else – you should seriously consider buying life insurance.
Use Life Insurance to Cover a Debt
Additionally, if you have any debt that you’d be leaving behind if you died, taking out a life insurance policy is a must. Be it a private student loan, a mortgage, or a car loan – leaving that debt behind could seriously harm the financial situation of your family. Burying your loved ones in debt after they’d lost you is the worst thing that could happen – and I’m sure you’d want to do everything you can to avoid that.
Life Insurance Policies Offer Built In Savings
On a lighter note, there are life insurance policies that may offer built-in savings (e.g., a whole life insurance policy). Have you heard of the term “forced savings?” The best way to illustrate this is to think of buying a house. If you’re buying a house with a mortgage, you have to put money into your mortgage – so it’s “forcing“ you to save.
Whole life insurance may act as a “forced savings account,” too. It’s pricier than other types of insurance, but the policy accumulates cash value over time. The savings are funded by a percentage of your premiums – and your life insurance company will also pay a dividend from their annual profits. Honestly, it may not be the most efficient way to save – but it is making you save, while also helping you feel at ease about your family’s financial wellbeing if something happened to you.
The Cost of Life Insurance Is Less Than You May Think
Finally, what puts many young people off is the cost of life insurance. After all, millennials face many other financial challenges these days – and who needs another monthly expense, right?
Well, if you’re worried about life insurance leaving a hole in your pocket – I’ve got some good news for you.
I often hear people say they just can’t afford life insurance – because they imagine it to be very expensive. In fact, according to a study conducted by Life Happens, millennials massively overestimate the cost of it. When asked how much a $250,000 term-time policy for a healthy 30-year-old would cost per year, the median estimate given by millennials was $1,000, while the actual cost was just $160!
With people thinking life insurance is way above their budget, no wonder only 10 percent of millennials have the life insurance policy they say they need.
Millennials Get The Best Rates
The truth is, life insurance costs much less than you think. Being young and healthy gives you an incredible advantage when shopping for life insurance – another reason to get it now. As a millennial, you will typically get better life insurance rates than any other age group. The older you are, the higher the price – because your life expectancy decreases with age, while the risk of health problems increases. As a result, the cost of a life insurance policy goes up. Makes sense, right?
As a young and healthy individual, on the other hand, you could get a decent life cover for as little as about $25 a month.
How Much Life Insurance Do I Need?
Pinpointing the ideal amount of life insurance cover is tricky – but making some calculations will allow you to make a sound estimate. The best way to calculate it is by looking at your long-term financial obligations and then subtracting your assets. How much insurance you need will, of course, depend on your circumstances, but as a rule of thumb, it shouldn’t be less than ten times more than your income.
If you have any dependents, the cover will need to be enough to replace your income – and also cover their expenses.
If you don’t have any dependents, you should think about any outstanding debt (college, mortgage, car loan, etc.). You’ll want to make sure your beneficiaries have enough to continue paying off those debts.
Maybe you want to provide a financial cushion to your family – for example, covering some of their medical expenses or contributing to family vacations. Think about how much you usually spend on stuff like that by adding up your expenses – then you’ll have a better idea of how big the sum should be.
Finally, you also need to think about end-of-life expenses – such as funeral costs. Making sure your policy covers that would help take the financial burden off your family’s shoulders (my advice would be to factor in at least $7,000 for funeral costs).
Do you find the various kinds of life insurance policies confusing? I don’t blame you! There’s a lot to take in – so let me break it down for you.
While there are hundreds of different life insurance variations on the market, here are the main types worth knowing about:
- Term life insurance. Term insurance is the most common type of life insurance. You pay for the death benefit that goes to your beneficiaries if you die – and it can be paid out as a lump sum, monthly payment, or annuity. What makes it so popular? It’s a lot more affordable than other types of policies. As the name suggests, term life insurance expires at the end of the term (which can last up to 30 years).
- Permanent life insurance. Permanent life insurance refers to policies that last as long as you pay the premiums. It’s an umbrella term, which covers many different types of specific life insurance policies.
- Whole life insurance. A type of permanent life insurance, whole life insurance is more expensive than term. As I’ve said before, whole life insurance has a cash value, meaning it could work as a sort of a built-in savings account.
- Universal life insurance. Like a whole life insurance policy, universal life insurance also has a cash value – so the premiums you pay go toward the death benefit, as well as the cash value. But with universal life insurance, you can change your premium and death benefit amount without taking out a new policy.
- Variable life insurance. Variable life insurance also falls under the permanent life insurance category – and, similarly to whole life insurance, has an investment component. The difference between the two is how the cash component works. With variable life insurance, your savings go into mutual fund-like sub-accounts, meaning the money can grow, but you may also lose some of it. With a whole insurance policy, the cash goes into a savings account, so the value of the money is unlikely to grow that much.
- Variable universal life insurance. As you may have guessed, this insurance type combines components of variable and universal policies. Your premium and death benefit amounts are adjustable, and you can also invest the cash value in the policy’s sub-accounts.
- Simplified issue life insurance. With this insurance type, there’s no medical exam (which is typically something you have to go through when applying for life insurance). You’re good to go after filling out a health questionnaire instead (if you have no serious health problems). This option may be ideal for healthy folks who want an insurance policy fast.
- Guaranteed issue life insurance. Not only will you be able to forego the medical exam with guaranteed issue life insurance – but you can also skip the health questionnaire. As long as your premium is paid, the insurer will cover you. This policy type is actually better for older people with declining health. If you’re young and healthy, other types of policies will offer better life insurance coverage at a cheaper cost.