Life Insurance – why you need it (sooner rather than later)
Immediate consideration for newlyweds is life insurance and it is not commonly addressed.
The wedding is over, a marriage certificate is processed, gifts are opened and thank you notes are written. I’m sure you are ready for a breather. I was! And while a breather is well deserved, stick with your “to-do list” momentum and find time to understand your life and financial planning needs as a new partnership.
Joining lives with someone results in new financial, insurance, and estate planning needs. It’s essential to understand and address these changes so you and your partner are aligned and well set up for future risks and opportunities. Let’s focus on life insurance.
Why is life insurance important?
Life insurance is a risk management tool. If you financially support (or plan to financially support) a partner, parents, or children life insurance is prudent to prevent those relying on you from financial ruin or loss. The hope is that the insurance is a waste of money, but if something did happen, your loved ones are taken care of. What if you are the one being supported? Think how your financial picture might look if you lost a permanent stream of income from a partner.
Why should I buy life insurance in my early years?
Life insurance is the cheapest when you are in your 20s. Insurance cost increases with age because an individual's health declines with age, making you a higher “risk” to the insurer. At 27, I purchased a 25-year term $2M policy and my monthly payment is $58. I chose a higher death benefit than I might have if I was a few years older because the increase in premium for the higher benefit was meniscal. The earlier you buy insurance, the cheaper it will be for the benefit received. Insurance premiums typically increase 8%-10% every year you age.
What are my insurance options? There are two types of insurance: permanent and term.
The term tends to suit most people's needs. It lasts for a certain number of years and is ideal for younger couples because it is more affordable. It provides a death benefit to the beneficiary if the insured dies during the contract period. A benefit of term insurance is that the premium is locked in over the contract period.
Permanent life insurance lasts for a lifetime, therefore making it more expensive. Some policies have fixed premiums while others adjust annually. For some, permanent is preferential over the term because there is a value beneficiaries can collect at the end of the contract. Permanent insurance can also allow for tax-advantage saving and an option to borrow against the cash value. Be mindful when exploring these policy options. If they sound too good to be true, there is usually something you are missing or do not fully understand.
Which one should I choose?
Deciding between permanent and term depends on you what you can afford and your goals. The term is prudent if you are young. Permanent insurance might make sense if you are older and can afford the premiums. If you are thinking of holding off until you have children or mortgage payments, reconsider. It’s likely you will have kids, a mortgage payment, or obligations one day that relies on your financial input. Take advantage of the lower premiums available to you; it will financially benefit you over the long run. It’s also much easier to take care of these things when life isn’t so demanding with kids, mortgages, and increasing adulthood responsibilities.
Another thing to consider, if you are a woman and planning to have children, purchase life insurance BEFORE pregnancy. You can still get coverage if you're pregnant. However, rates could increase depending on which trimester you are in and if you've experienced complications.
How much insurance do I need?
You need enough insurance to pay off debt (mortgage, student loans, credit cards, etc.) plus income replacement with a little extra for an inflation hedge. I’ve seen people rely solely on their company’s insurance policies through work. While it is good to have these policies, it is often not enough. Typical employer policies offer one to three times your salary. That meets income replacement for a few years but likely does not cover the debt. I advise purchasing supplemental insurance through a private provider. Additionally, with private insurance, you remain covered if you leave your job or decide not to return to work.
As far as the length of coverage goes, you want to have insurance up until dependents are no longer relying on you. For most parents, this is a few years after college.
Another question I get is, “Should I purchase insurance on a dependent?” This is often sold to individuals as “good to have” for funeral costs or medical debt in case they were to predecease. There is some merit to this argument and if you can afford the additional premium, consider it. However, life insurance for you (and whoever else is a financial provider), saving for your retirement, and paying off high-interest rate debt takes precedence.
How do I purchase insurance?
When you’re ready, go online and get quotes. There are several insurance agencies (Policy Genius, Zander Insurance, Bankrate, for example) that will do the work to help you get the best quote; it’s like shopping for car insurance. Some.
Be ready for the phone calls, though. It does take speaking with someone to complete the insurance application.
The agent we worked with made it quick and easy. The initial phone call for completing the application was approximately 30 minutes. The agent was also dedicated to helping us get the best cost. When a company we intended to purchase insurance through came back with a higher premium than originally quoted, our agent helped us pivot to a new company offering a better rate.
Whoever you decide to go through, make sure to stay engaged in the process and work towards getting the right policy at the best price. Do your due diligence.
If you don’t know what is appropriate for you or need a second opinion, ask your financial advisor. It’s best to get the advice upfront, early in the process so you can do it right the first time. The amount and policy terms necessary are unique to your situation.
Here is a great graphic that summarizes your insurance options. Click to open.
~ Rachel Bubb
Sources:
https://www.investopedia.com/articles/personal-finance/022615/how-age-affects-life-insurance-rates