Life insurance is often perceived as one of those things that is decidedly “adult.” A life insurance policy can seem like a strange thing to millennials — something to put off for years, or even decades.
For most 20-somethings, a life insurance policy may be an afterthought. It’s still important to understand what it is, the benefits it provides, and when it might be critical to have a policy.
What is Life Insurance?
There are two Reddit posts (here and here) which do a great job at diving into what life insurance is and the purpose it serves. I’ll distill the necessary details if you don’t have time to do a thorough reading, but encourage you to check out those threads, the comments, and other posts on the personal finance subreddit when you have time.
The primary reason to retain a life insurance policy is, of course, to provide for your dependents financially if you die. But it’s not as simple as just buying a policy. First, you’ll need to choose what kind of insurance suits you best. There are two main categories of life insurance: term and permanent (commonly referred to as whole life).
Term life insurance lasts for a set amount of time, generally anywhere from 5 to 30 years. You pay a monthly premium, just like with auto insurance, in exchange for an amount of cash if you die during that time. Of course, as you get older, your risk of dying increases, and monthly premiums increase with that. A 20-something today might be able to get a $500,000 10-year term life insurance policy for $30/month, for example. At the end of those ten years, they’d have to renew the policy, likely at a higher premium. Think of term life insurance as temporary, similar to leasing a car.
Learn More: All About Term Life Insurance
Whole life insurance is permanent. It’ll be there for, as the name suggests, your whole life. These policies have an account attached to them that accumulates cash value and can earn dividends. You can look at whole life insurance as a sort of investment vehicle, though we’ll get to the cons of that in a bit. You can borrow against your whole life insurance policy, you can re-invest or use the dividends to pay the premium, and you can generally build savings in the same way you would through another investment vehicle.
There are other kinds of policies, chief among them universal life insurance, which is a form of permanent insurance that lets you change premiums, benefits, and access to the cash value of the policy. The goal of universal life insurance is to let you contribute enough interest-earning funds to make up for the cost of your policy going up as life goes on. It sounds great on paper but is a complex subject worth its own post. I’d strongly encourage employing the services of a fiduciary (not your insurance agent) to explore this further.
Do I Need Life Insurance?
If you’re a millennial with no dependents, you might not need life insurance. I’d almost go so far as to say if you’re any age without dependents, you might not need it. Again, the purpose of life insurance is allowing loved ones to live without the burden of your lost income.
If you’re unmarried and childless, there are few scenarios where life insurance might be warranted (which I’ll cover next). If you’re married, but without kids, you can also consider skipping a life insurance policy. Only go this route if your spouse is working with sufficient income and wouldn’t be significantly burdened financially by your untimely death.
Also Helpful: The Complete Guide to Life Insurance
If you have dependents, you’ll want to think carefully about the right insurance for you. Most will want a term policy, as that covers most lifestyle scenarios. Whole life is beneficial if you have long-term dependents, like a disabled child or spouse. (In this case, I would argue that you should also consider trusts.) As I suggested above, I encourage you to contact a fiduciary to work through this. Your insurance agent’s goal is to sell you on a product, not provide you with the right financial advice.
Life Happens has a very simple calculator that can be used to gauge the right policy for you.
Final Expenses and Debt Repayment
There are two common reasons for millennials to take out life insurance. Usually, it is to cover their funeral and to repay any outstanding debts. Both of these are worthy of consideration.
Average funeral costs range between $7,000 to $10,000. An appropriately-sized emergency fund might fully negate that cost or significantly offset it. This would effectively eliminating the need for a life insurance policy. Make sure to contact your bank to ensure that accounts are properly set up to transfer upon death.
Perhaps you don’t have enough transferable liquid assets to cover this cost, and have no other dependents or final expenses. In this case, I’d argue the money for a small policy to cover funeral costs is better spent elsewhere. Namely in building up that emergency fund.
Debt repayment is a tricky subject, as this involves loans of all shapes and sizes. Primarily, you need to understand which of your debts, if any, will transfer to a co-signer or spouse, or go unforgiven. Many student loans, nearly all auto loans, and most other individual debts can’t be transferred to heirs, spouses, or other family members who haven’t co-signed.
One exception to this is if you live in a “community property” state. There, a spouse may be held liable for debts. If you have student loans for which parents co-signed, you may want a policy to cover balances upon your death. I’ve personally encountered this in the past. I had to pay off a private student loan that was also in my mother’s name.
Planning For the Future
You might not need life insurance now, but you should definitely plan for it and understand when you’ll need a policy. Getting married, having children, or having other loved ones that you want to care for (your parents or siblings, for example) all necessitate a close look at an appropriate life insurance policy. Always keep in mind the primary purpose of life insurance and contact a fiduciary or estate attorney if you find yourself in a complex situation.