The key to financial planning is planning ahead, and there’s not much further ahead than your own funeral. Let’s talk life insurance.
Are we even still saying #yolo? Either way, this once trendy expression is actually quite factual — you do only live once. So while we’re cliff diving in Jamaica, hiking Table Mountain, camping at Lake Mead, skiing the Alps, jumping out of airplanes, or just eating questionable leftovers, why not have plan z prepared for the worst-case scenario.
As young adults, we tend to think we’re invincible, when in reality it only takes a second to lose your life. I know this is a pretty morbid conversation with limited room to be playful, but we have to talk about it. Part of living a financially responsible life is planning ahead. And part of planning ahead is looking into life insurance before you really need it (hard to look into it when you need it…okay I’ll stop).
So let’s take it back to grade school and play a little “true or false.” Winner gets financial freedom after death.
- I’m not married, and I don’t have dependents, so I don’t need life insurance.
At the very least, someone is going to care that you died and want to honor your life/death in some way. According to the National Funeral Directors Association, the median price for a funeral in 2017 was about $9,000. So while life insurance has more benefit for someone with a spouse, kids, other dependents, or a mortgage for whom/which they may need to leave replacement income for, you could give your loved ones the final gift of not worrying about your post-life expenses during their time of grief.
- Life insurance is too expensive.
According to a 2015 Insurance Barometer Study, when asked how much the yearly cost would be for a 20-year $250,000 level term life insurance policy for a healthy 30-year-old, 80 percent of people overestimated the cost at $400, $600, or even $1,000 a year. The true cost of that policy would be about $160 a year, which equates to about 40 cents a day or $13 a month. That’s cheaper than your daily cup of coffee!
- Life insurance is cheaper now because I am younger.
Everyone loves a good deal, so why should that be exclusive to clothes, shoes and gadgets? The premiums are often significantly less expensive when you are young and healthy. Most people in their 20s and 30s can receive good policies around $200,000 to $300,000 in coverage for $15 to $20 a month in some cases. More importantly, if you invest now in a longer-term policy of 20, 30 or 40 years, you’ll likely be covered at a very low rate throughout your entire career.
- The life insurance I get through my job is enough.
While the rule of thumb for the amount of life insurance you should take out is said to be 10 times your annual salary, most employer-provided life insurance coverage is one to three times your salary. But really it all depends on your financial obligations and how much money your survivors would need to ensure all expenses are taken care of. The Life and Health Insurance Foundation for Education, a nonprofit group financed by the insurance industry, has a free calculator on their homepage to estimate your family’s expenses in the case of your death.
Conclusion: It depends.
- Life insurance is an investment.
Many young people see life insurance as a waste, pumping money into a system where the return on investment is never to be seen by the insurer; but purchasing insurance at this age can actually be viewed as a good investment. When you purchase permanent life insurance, part of your premium goes into a cash value account that can grow based upon a variety of variables. The main advantage being that you can basically take a loan from yourself to pay for things like retirement or education expenses without paying taxes on it.
Conclusion: It’s a little blurry.
As human beings we need water, food, clothing, and shelter to survive. No one absolutely needs life insurance. It’s more of a nice-to-have, and even then, it might not be the best decision for everyone. If you have substantial assets, no debt, and no dependents, it might make more sense for you to self-insure, and set aside the money yourself. My recommendation is to speak to a Certified Financial Planner to determine what makes the most sense for you.