If you fall into the Millennials category, we can agree getting started with life insurance is a challenging topic.
If you own a vehicle the law requires you to carry auto insurance, no matter which state you live in.
If you have a loan on your home, generally you are required to carry homeowners insurance. The bank wants to know they will get their money back if you experience a catastrophe.
Yet no one requires you to protect the engine that generates income for your family.
I’m talking about you.
You produce an income for your family. Without you; then what?
“It is a strange anomaly that men should be careful to insure their houses, their ships, and their merchandise, and yet neglect to insure their lives.”
Benjamin Franklin
Quick Guide
- Why Do Millennials Need Life Insurance?
- Term Life Insurance
- Duration of Term Life Insurance
- Term Return of Premium Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- How Much Life Insurance Do I Need?
- Next Steps
Why Do Millennials Need Life Insurance?
Did you ever rush home to watch Saved by the Bell or fire up your Nintendo for an intense game of Tecmo Super Bowl with your brother?
Is it just me or does that seem like yesterday?
Now we have a mortgage, maybe kid(s), and I’m going out on a limb here, but your Friday nights are different too. Funny how things change with time.
No one wants to talk about death. It’s hard to comprehend. Yet it’s ok to talk about/plan for the day when you can quit working, play golf, and sip on umbrella drinks all day?
Life Insurance should be part of your overall financial plan.
Here are a few questions to ask yourself (or discuss with your significant other):
- Does someone at home depend on you?
- Do you owe money (auto, home, business, college loans, etc)?
- Do you own a business?
- Care for relatives?
Did I mention you can save money buying life insurance now (versus in the future)?
“Your future income is the single greatest asset you have.”
Wakefield Hare, CFP | Founder of Greater Than Financial, LLC
Term Life Insurance
Term life insurance is the cheapest form of life insurance. The younger you are the cheaper it will be (providing you don’t have any health concerns).
Think of it like this; life insurance is purchased with your health. Not money. To be insurable, you have to be healthy. You pay for life insurance with money, but it is purchased with your health.
Term insurance has a specific start and end date. Let’s say you buy a 10 year Term policy today. 10 years from today your policy will expire. Should you pass away within the Term your beneficiary would collect the Death Benefit.
If you quit paying the premium, the policy cancels.
It is also important to note, your premiums are locked in for the entire policy with a standard Term Life Insurance policy.
Duration of Term Life Insurance
Term life insurance can be purchased in increments of (this varies depending on the insurance company):
- 5 year
- 10 year
- 15 year
- 20 year
- 25 year
- 30 year
The length of Term you purchase depends on your needs.
For instance; you have 20 years left to pay on your home. If something happened to you prior to your home being paid off life insurance would alleviate the burden of a mortgage for your family.
Term Return of Premium Life Insurance
Term Return of Premium life insurance works the same way as a standard Term life policy. The difference is at the end of the term, if you’re still alive, you receive all of your premium back. No questions asked.
Some life insurance companies structure their Term Return of Premium life policies slightly different. It is set up like a standard Term life policy with a Return of Premium endorsement attached to it. At the end of the term, if you haven’t used the policy you only receive a portion of the premium back. Double check how the policy works before you buy it.
It’s important to understand, if you cancel the policy before the end of the term, you do not receive any money back.
Return of Premium Term policies do not accrue interest either.
Lastly, Return of Premium Term policies are more expensive than your standard Term life policies.
Whole Life Insurance
Whole Life Insurance (also known as Permanent Life Insurance), is guaranteed for life. As long as you pay your premium, the policy will stay with you.
Premiums on a Whole Life policy are locked in. You don’t have to worry about them fluctuating.
Whole Life Insurance does have some unique characteristics. For starters, these policies build Cash Value. Your Whole Life policy will accrue interest. Once the policy has built up enough Cash Value you have the ability to borrow from the policy. Be aware, borrowing from your life policy will reduce the Death Benefit and you will owe interest on the loan.
Don’t confuse Cash Value with Death Benefit. The Death Benefit is what your Beneficiary receives when you pass away.
If you have built up enough Cash Value you may be able to use it to pay future premiums too.
Another perk is being able to use your Whole Life policy as collateral for a loan. It may be a car loan for instance.
Before you Surrender a life insurance policy be certain you do not need coverage and/or that you can get life insurance elsewhere in the future should you want it. The last thing you want to do is Surrender your life policy and find out later you’re no longer insurable.
“Do not take life too seriously. You will never get out of it alive.”
Elbert Hubbard
Universal Life Insurance
Universal Life insurance is in the family of Permanent Life insurance. It is similar to Whole Life, but with its own nuances.
Flexibility. That’s the one big takeaway you will find when looking at Universal Life.
For starters, Universal Life Insurance is designed to last your lifetime (as long as you pay the premiums).
The policy will build Cash Value (which is tax-deferred). Once the Cash Value of the policy meets a certain level you may borrow or withdraw from the policy. Loans are tax free and they will accrue interest.
It’s also important to note, when you borrow from your Universal Life policy, loans plus the accrued interest will reduce the death benefit. The same is true for withdrawals.
The policy continues as long as the Cash Value is sufficient to cover the various deductions each month
The main difference between Universal Life and Whole Life is Whole Life premiums are locked in for the life of the policy. Where as with Universal Life you have the ability to adjust the premiums and Death Benefit.
If you choose to go this route, consult with an insurance agent with experience in Universal Life. If it’s not set up properly it will be a headache later on.
How Much Life Insurance Do I Need?
It really depends on your needs. Let’s say you choose to go with a standard Term Life policy. Here are a couple of examples…
Example 1
You’re a single 24 year old female, recently graduated college and you have $125,000 in debt. Should something happen to you, ideally you want to make sure the debt is taken care of.
A 20 year Term with a Death Benefit of $125,000 would be $14 per month.
Example 2
Now let’s change the scenario. You’re a 30 year old female with a husband and kids at home.
Again, how much coverage you need will depend on your situation. 10x your income is a good rule of thumb.
Take Into Consideration
A few things you need to think about/discuss when trying to determine how much life insurance you need:
- Take time to look at your expenses/debt (i.e. home, auto, student loans, etc). How much do you owe? Realistically, when do you hope to have it paid off?
- If you have a significant other, how many years would he/she need your income? Remember, if you’re not in the picture, that’s one less income.
- How much would a funeral cost (and everything associated with it)?
- Do you want to leave money to a charity or your kid(s) future education?
Next Steps
I realize this is a ton of information.
The biggest takeaway from this – commit to getting a policy in place within the next 30 days.
Yes, the type of life insurance policy you buy is important, but something is better than nothing if you have someone at home that depends on you financially.
Keep in mind, life insurance should be reviewed every couple of years. Just like you review your retirement plan. Life changes. You may need to change your beneficiary or buy more coverage.
