Considering the dizzying array of financial priorities Millennials are forced to face as they become “grown-ups” —repaying college debt, a new mortgage, marriage, babies, and climbing the corporate ladder—it’s no wonder life insurance doesn’t rank high on their hit list. The problem is that it should— for the very reasons aforementioned. Life insurance provides a safety net to cover all those responsibilities if something happens to you.
Let’s face it… young people haven’t had the longevity to build up a financial empire yet with a retirement plan or hefty savings so if you have people depending on your income for support, they may not have a fallback position.
So what’s scaring off young Millennials and holding them back from buying life insurance? Probably fear of the unknown. Life insurance is something your parents bought, not young, carefree you. Young people feel they are in the “building years” and have nothing to lose. But it’s a classic Catch 22— the more you work to acquire and build financial stability for yourself, a spouse, or a baby— the more you risk losing by not having financial protection in place. Think of life insurance as a golden parachute that will not cost the price of gold. Surprised? I’ll bet you thought buying a policy was pricey. Well, Millennials here’s an eye-opening example for you:
The price of a $1 million, 20-year term life insurance policy (enough time for your kids to finish college) for a healthy, non-smoker, 30-year old is about $1 dollar a day, or $30 monthly. That’s right… a lot less than your monthly skinny latte bill! Now that’s a savings plan you can bank on.
Here are the basics and probably all you care to know about the boring topic of life insurance. There are two basic types— term and permanent, a/k/a cash value life insurance.
Term life insurance policy is the most straightforward… it lasts for a specific period (term), generally 5-30 years. You would be interested in buying so-called “level” term, which maintains the exact same premium rate you pay throughout the life of the policy. If you die within that time period, your beneficiaries will collect a “death” benefit, in cash, which is tax-free to them. You don’t receive anything if you are still alive when the policy expires but aside from that bit of good news (you’re alive), it’s like any insurance coverage (auto, home)— you need it, in case you really NEED it. There is a way to cash in on life insurance, though with permanent insurance— Whole Life, Universal Life, Indexed Universal Life (IUL) policies. They act as an “investment” or savings plan but you will pay for it… about four times more in premiums than you would for term insurance.
Financial experts will tell you permanent insurance is not a good investment for younger people… opting instead for a cheap term life policy and using the savings to invest in low-cost funds. There is a way to have your cake and eat it too though. You can spend a little more on your level term policy with a conversion option, which allows you to convert that policy into permanent insurance when you have the financial ability to pay for it. It may be worth considering but you have a while to think about it. The good news with this option is that you don’t have to prove your insurability in order to convert that policy later when you might not be as healthy as you are now. The only thing the insurance company will consider at that time to determine how much you will pay is your current or “attained” age.
In order to figure out how much death benefit to buy for your beneficiaries to live on without your financial support, take out your smartphone calculator and start figuring out long-term expenses. Add up the big-ticket items such as mortgage payments, the cost of a college education per child, your own debt such as unpaid student loans, credit cards, etc. If your parents are your college loan co-signers they will get stuck with the bill for the balance of those private student loans. If your employer pays for a small life insurance policy while you’re employed, that’s a nice windfall and probably enough to cover your funeral expenses but it likely won’t be enough to cover the rest of your responsibilities.
There is more sophisticated planning software to assess your overall future financial needs but a basic formula in which you multiply your annual outlay now, with the projected need in ten or twenty years should provide a ballpark figure. If you fill out a quote request and find that there’s only a small difference in buying a bit more insurance, you’re better off making that choice now while you’re young and healthy and those premium rates are at their lowest.