Earlier this month, I wrote about the different types of insurance Millennials should look into. If you are in your 20s or 30s, you may not have considered life insurance.
At its root, life insurance is a tool for those that have someone who depend on them or their income. The proceeds from life insurance can be used to support those who depend on you after you’re gone, which means you can help your children pay for future goals, set your surviving spouse up for retirement, or pay down your family’s debts.
Whether you are single or married, debt free or working towards paying off your mortgage or student loans, it is worth researching whether or not you could benefit from having life insurance.
The Financial Impact
Let me start by saying that losing someone close to you is one of the hardest things to go through. Nothing will ever replace your loved one. And this devastating loss can also come with a financial burden. You might find yourself having to take on less work to take care of your children, and a sudden reduction of income can make it difficult or even impossible to meet your financial obligations.
Life insurance is going to act as a guardrail in your life. Having the right amount of insurance will help you and your family stay on course with your financial plan, even in the face of a devastating loss. This is why we have financial planning in place, to not only think about how to be successful and have fun, but also how to be prepared for the unexpected.
Don’t Avoid the Conversation
Nobody wants to talk about what will happen after they are gone, but it is important to discuss these things. As exciting as it is to plan for the fun things in life, sometimes we also must take a step back and talk about what we would do if the unexpected should happen, and how we can mitigate that risk.
Term Life Insurance
When looking for policies, you are going to come across a lot of confusing names for insurance. Names such as whole-life, term-life, permanent, etc.
Additionally, you might conclude that life insurance is extremely expensive for something you may never use. Some salespeople like to push expensive products because they earn more in commissions, so pay attention and make sure you trust the person you’re speaking with.
The Insurance I recommend to Millennials is term life insurance, which is a cheaper route than other kinds of policies.
What is term life insurance?
This insurance covers you for a set number of years and for a set dollar amount. After which, the policy will expire, and you will no longer be insured.
How much insurance should I have?
This is a tough question to answer because it depends. You will find on the internet that 10x your salary is the rule of thumb. But a good plan will lay out some additional facts such as:
Do you have debts?
Will your surviving spouse have to cut back on work to stay home more?
What is your cost of living?
If you pass and can no longer contribute to retirement accounts, will your spouse be able to make up for those lost contributions?
These are the kind of questions that we factor in to determine the amount of coverage needed in your policy. As for the term-length, that also depends on your situation. The ultimate goal is to have contributed so much to your investment accounts that you become self-insured and no longer need a policy. The good news is that you can cancel a policy at any time and if you still need the policy after the term has expired, you can just purchase a new one.
For example, if you have a young family and you would like your income to be covered until your kids are 25, you may need a 20-year policy.
Real life scenarios:
A 22-year-old who is in college but hasn’t taken out any loans.
No, this person doesn’t need life insurance because they have not taken out any loans and have no dependents. Some salesperson is going to argue that they should be covered, and they will make it sound very enticing to buy insurance. They might argue that it will be cheaper to buy now than in the future, or that they will be guaranteed insurance in the future regardless of their health.
On the counter, if this student had taken out loans that the parents co-signed on, it may be beneficial to look at a policy so that the parents would not be left with the burden of paying those debts.
A 40-year-old couple that both make good money and rent an apartment in San Francisco with no debts.
This can be a hard decision because it’s not black and white. Although they both make good money, if they rely on each other’s income to maintain their lifestyle, they should look into a policy to substitute the other’s income. If they can sustain their lifestyle on just one income, I would say they could get away with no insurance.
A 30-year-old couple with a kid, a mortgage, and some debt.
Yes, this couple would want to have life insurance. If you remember, life insurance should be considered if you are supporting someone. In this case, if one spouse was to pass, they would need to supplement income to cover the mortgage or pay off the home, pay off the debt, and support the child and the surviving spouse’s lifestyle and future goals.
Summary
Here is a quick summary of everything I covered if you don’t currently have life insurance.
1) Are you supporting someone? i.e., kids, spouse, family.
2) Will your business rely on it?
3) Will heirs have to pay estate taxes they cannot afford?
4) Are there debts that will be passed on?
5) Will a funeral be a burden?
6) Will all your and your spouse's goals be covered after you are gone?
Where do I go now?
Being an independent financial advisor, I recommend shopping for insurance through an independent salesperson. Independent means they are not forced to sell any specific insurance that is tied to their company, and they can source the best deals. The other option is to find out if you can bundle some of your other insurance policies to lower the cost altogether. Stick with someone reputable as you want your insurance company to remain in business through the life of the policy. I do not sell insurance, but if you are curious about where to go, let me know and I can point you in the right direction.
Five Pine Wealth Management is a registered investment advisor offering advisory services in the State(s) of Idaho and Washington and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
The information in this blog is for informational purposes only and should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security or advisory service in any jurisdiction where such solicitation, offer, or recommendation would be unlawful or unauthorized.
The information provided should not be relied upon as the sole factor in an investment making decision. Past performance is no guarantee of future results.