Given the long list of financial worries facing twenty-somethings, you’d think life insurance would be at the bottom of the list. But some experts think it’s a foundational piece of your financial plan.
“Life insurance is typically the last thing millennials focus on. They are much more concerned about budgeting and paying off debts,” says Jennifer Fitzgerald, chief executive officer of PolicyGenius, an online insurance portal. “But if you have people dependent on your income, not having life insurance can derail everything. It’s the safety net that should come first, not last.”
That’s because most young folks have yet to build up a fat 401(k), accumulate home equity, or build the kind of savings that could be used to support your family if you were to die. Until you’ve done some empire building, a life insurance policy is the pot of money that will take care of anyone dependent on you.
The stakes grow along with your family. Partners, children, and mortgages bolster the need for life insurance. And yes, you can definitely afford this. A 25-year-old in good health likely won’t need to spend more than $50 or $60 or so a month to purchase a term life insurance policy that would pay out $1 million if you were to die in the next 25 years. That’s a boatload of protection for around $2 a day.
A 35-year should plan on budgeting around $70 or so a month for a $1 million policy. Even better, no need for a face-to-face with a pushy salesperson; you can get what you need with some laid back online shopping.
The Facts of Life Insurance
Come to Term. There are two broad types of insurance: term and permanent. As its name implies, term insurance is in place for a specific term: that can typically be five years to 30 years. With a level-term policy the premium you pay each year will never change; it’s based on your health at the time you purchase, your age, and how large a payout you want to provide–that’s called the death benefit.
If you die during the term, your beneficiaries collect the benefit. If you are still alive when the term ends, you walk away with nothing. The best news is you’re walking, but if that sounds like a waste of money, think about your renter’s, or homeowner’s, or car insurance. You have that coverage to protect you from a financial calamity, without any expectation of an investment return.
Beware of anyone pushing permanent insurance, such as a whole-life policy, especially for a young buyer. Permanent coverage is much more expensive than a term life policy in large part because it includes an investing component. You’re better off buying a cheap term life policy and taking the savings and investing in low-cost mutual funds and ETFs on your own. Jamie Hopkins, assistant professor at The American College of Financial Services, notes that a permanent policy might be something to consider down the line if you become an entrepreneurial mogul with a multi-million dollar estate. “For most millennials, at this stage of your life, term is the way to go.”
Purchase a Comprehensive Safety Net. When thinking about how big a death benefit you need, be sure to think long term, not just whether the bills can get paid for a few months. If you are married or living with someone, will they be able to keep paying the rent, or the mortgage? Got young kids who need plenty of care today and who you very much want to attend college without drowning in loans? Any chance you had your parents co-sign a private student loan or two for you back in the day? Unlike federal student loans, private loans aren’t “discharged” if you die. Do your parents a favor and find a life insurance policy that would cover the balance of your private student loans.
You might have some free life insurance provided through work, with a death benefit of$25,000, $50,000 or maybe one or two times your annual salary. Chances are you’ll want more protection. Be aware, when you leave that job, you likely lose the free coverage.
Hopkins recommends using “goals-based planning” to determine how much insurance you need. “What do you want the life insurance to accomplish?” If it’s making sure the mortgage can be paid off and that your young children can one day attend a private college, you are going to want a lot more than one to two times your annual salary.
Shop Around. Many employers who provide a base level of free life insurance, also give employees the chance to buy additional “supplemental” coverage. Convenience–and automatic payroll deduction–has its charms, but you should also shop online for a policy.
If you don’t smoke and don’t have a pre-existing medical condition, you may land a better deal than buying through your employer. The rates through work are based on a group policy that mixes young and old employees. “Younger workers subsidize older workers,” Fitzgerald points out. You may also find that supplemental insurance is capped below the level you need.
Sites including PolicyGenius, Quotacy, and AccuQuote shop among multiple insurers to get you the best deal based on your needs. The sites also have free tools to help you figure out the right death benefit.
If you do decide to go with what’s offered through work, confirm that any coverage you purchase is “portable.” This means that if and when you leave your job, you can keep your insurance.