Quick Article Guide
1. Two Types of Life Insurance
2. Which is Best for Millennials? 3. Affordable Lifetime Coverage
4. Aligning Your Coverage with Your Debts
5. Buy While You’re Young
6. Life Insurance for Young Entrepreneurs
7. How Much Life Insurance Should A Millennial Purchase?
8. How to Shop Wisely
Life insurance might not be high on a millennial’s list of priorities, but it is indeed necessary for young adults in their 20s and 30s. A 2015 study by LIMRA, the Life Insurance Marketing & Research Association, found that only 11 percent of millennials said they were likely to buy life insurance. Their reasoning? It’s “too expensive,” and there are other more pressing financial priorities to attend to.
While life insurance can certainly be expensive for some people, that’s generally not the case for a young, healthy millennial. Here’s a complete guide to help “20-somethings” and “30-somethings” understand life insurance.
There are two main types of life insurance: term life and whole life.
We describe term life insurance as pure protection. Term life provides a death benefit (money paid to your spouse or heirs to cover income loss and assets in the event of your death) at a fixed premium, for a set period of time (your term), with annual renewable terms. Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.
Whole life insurance provides lifetime protection at fixed periodic premiums and builds cash value in addition to your death benefit. If you have ever shopped for life insurance and felt that it was too complicated, there’s a good chance you were looking at whole life insurance. There are many different types of whole life insurance, from indexed universal life policies embedded in stock market indexes to variable universal life, which is actually invested in the stock market.
Essentially, term life is for if you die, while whole life is for when you die.
Everyone we speak to has unique life plans and circumstances. But for the most part, millennials tend to purchase term life insurance to replace their future income if they die before their financial commitments are taken care of. If you buy term insurance while young and healthy, the cost is exceedingly low—like, less than a month’s worth of morning coffee type of low. A 30-year-old male can usually secure a $1 million policy for as little as $22 per month.
Whole life is occasionally purchased by millennials, but often for the wrong reason. Agents tout whole life policies for their “cash value,” money you can theoretically tap into later in life. The concept is appealing, but these policies rarely perform as pitched and carry with them a high market risk. Plus, whole life can get be very expensive. Most financial advisors without a stake in selling cash accrual policies will generally recommend keeping your life insurance and investments separate and steering away from cash accrual policies altogether.
There is an affordable alternative to “permanent” whole life policies called “Guaranteed Universal Life” insurance (GUL). In a GUL policy, you are locked in for coverage up to a specific age: 90, 95, 100, all the way up to 121. Guaranteed universal life insurance is not whole life insurance and does not build a cash value. It is similar to term life insurance, with your term being defined by age rather than years.
Guaranteed universal life will cost more than term life but much less than whole life. Also remember that life insurance is paid to your beneficiaries tax-free, either as a lump sum or in installments. We’re seeing an increasing number of forward-thinking millennials buying these policies to ensure a tax-free inheritance for their kids, or just for general peace of mind in knowing that family members will not have to incur the costs of any major debts. To learn more about how taxes impact your life insurance payout read our guide here.
Did you know that you’re not limited to purchasing one life insurance policy? “Term layering” or “term laddering” is a popular strategy that involves buying two or more term life policies to align with your debts and income.
For example, let’s say Bob is 30 years old and married with two children, ages 2 and 5. For the next 20 years, Bob will want to have the most coverage possible until the kids are grown and able to take care of themselves. He has a 30-year mortgage, so a 20-year term policy would leave a 10-year lapse in mortgage protection. At the same time, he also doesn’t need maximum coverage for a full 30-year term, because after 20 years, his children will hopefully be self-sufficient and he’ll need less life insurance.
To meet both of his needs, Bob buys two term life insurance policies, one for 20 years and one for 30 years, each with a $500,000 death benefit. This also allows him to lock in 30 years of coverage while he is in good health and able to get better rates. After Bob’s 20-year policy expires, he will shed that policy’s monthly premium while still having the 30-year policy to mirror the mortgage. When the 30-year policy expires, he can renew his policy, convert it to a permanent policy, or buy a new policy altogether, based on his needs.
Layering policies, also known as “staggering”, enables you to protect your family for a larger amount of money in their most vulnerable times. As you get older and your debts and responsibilities diminish, your need for life insurance should decline, along with what you’re paying for it.
Buying life insurance while you’re young and in good health puts you at a distinct advantage. With every year you age, your rates will go up roughly 10 percent. This increase will be magnified if you end up being diagnosed with even a common health issue such as anxiety or hypertension, in which case the $22 per month term policy we mentioned earlier will likely more than double to $50 per month. If you have a family history of any serious health complication such as heart disease or diabetes, it’s even more of a reason to buy while you’re young.
Check out our Rates By Age page to see how great it is to be young!
Another common thread among millennials is entrepreneurship. Experts have noted this trend for a few years now, finding in some studies that 1 out of 5 millennials say they want to quit their current jobs and start their own projects. If you’re taking out your first business loan, the Small Business Administration and many other lenders might require you to carry life insurance in order to “collateralize” the loan. Fun fact: Walt Disney funded Disneyland mostly with life insurance.
We usually recommended buying at least 20 times your current net annual income. In essence, this would replace your paycheck for your family for at least 20 years. If your spouse is not currently bringing in any income, that doesn’t exclude them from needing life insurance. If something were to happen to them, you would need money for household expenses, daycare/babysitting, laundry services, groceries, transporting the children to and from school, etc. A homemaker spouse should carry at least half of the amount of coverage as the income-earning spouse. Read our article on tips for getting life insurance for your spouse.
If you’re reading this article, you likely lead a very busy life. One of the last things you want to do is to call a half dozen life insurance companies to compare rates.
Most people take the path of least resistance, buying life insurance through their home and auto insurer. Be advised that those companies generally charge 20 to 30 percent higher rates, often for less favorable coverage (because they don’t specialize in life insurance).
An independent agent like JRC can shop different carriers to help you find the best coverage at the best rate. Our sole interest is in finding you an affordable life insurance policy that fits your needs. To learn more, call us at 855-247-9555, or get a free life insurance quote online today.
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