Life Insurance Explained

Life Insurance Explained

Life Insurance can be a confusing and distant topic for young people that are just starting out their careers. I guarantee that the last things you are thinking about as you drive off to work are things like the government’s estimate of your life expectancy, monthly premium cost, term vs. whole vs. universal policies, and if you have enough coverage.

Let me be blunt – I bet that you barely know anything about life insurance, at least not enough to think very hard about it. I didn’t until recently, and I wouldn’t expect any other Millennial to know this stuff. Life Insurance was just another one of those things that you and I don’t remember from our high school finance class.

Actually, my high school didn’t really have a finance class. Yours probably didn’t either.

🙁

That’s a topic for another day. The important thing here is that life insurance is surprisingly important for your financial future, and at the very least you need to know the differences between the following types of coverage:

Term Life Insurance

Term life is the most popular type of life insurance, as well as the cheapest. Many people like this type of life insurance because it has a low monthly premium in comparison to the amount of coverage that you can receive. I went to Newyorklife.com and got some free life insurance quotes so that I could show you the kind of costs we are talking about here. I am a 26 year old non-smoker in excellent health. A 10 year, $250,000 policy would cost me about $15 a month. A 20 year, $500,000 policy would cost me about $30 a month. A 20 year $1,000,000 policy would cost me about $50 a month.

Child please – you don’t need  $1,000,000 of coverage. The first one is the most realistic for both of us.

Basically, I am paying $1,800 out of pocket over the next 10 years to get $250,000 of coverage. 

There is NO cash value to the insurance policy, and your benefits will expire after the 10 year term unless you decide to renew your policy. Just FYI – it will cost more than $15 a month when you renew the next time. (It keeps going up as you get older and are more likely to die before the policy expires, hence making you riskier for the life insurance company to insure). You will also most likely have more assets to cover the cost of the next time you re-up, which will cost you more too. The insurance company does not want you to die while you are covered, but if you are, they want as much money as they can get while you’re alive. That’s how the world works, get over it.

The other caveat? Your life insurance company can randomly change the price that you agreed to pay at any point after you renew. That kinda sucks.

Whole Life Insurance

The first reaction most people will have when you talk to them about whole life insurance will probably sound something like “Dude, that is way too expensive”. They are right, sort of. However, if they are someone that finances their cars and house up to their eyeballs then you shouldn’t be talking to them about money in the first place. They suck at money. Read blogs like this instead.

Whole life insurance is significantly more expensive than a term life policy and you may not be able to afford it at this point in time because you are getting rid of your student loans. What you need to realize about whole (also called permanent) life insurance is that it holds a cash value and can be borrowed against while you are paying into the policy. Whole life insurance policies are also guaranteed and the premium will stay the same throughout the length of the policy. Just FYI – the end of the policy term is when you die. Sorry.

Universal Life Insurance

Universal life insurance is basically a hybrid of term life insurance and whole life insurance. These policies have a cash value and are designed to cover you for the rest of your life – just like whole life insurance, but they are adjustable and the coverage can be changed later on if you need a different level of coverage. It also falls in the middle ground between the first two types of life insurance as far as costs. Universal is generally more expensive than term life insurance annually, but less than whole life insurance.

Why do you even need life insurance?

Life insurance is designed to protect your family and loved ones from your financial burden after you die. I’ll give an example that applies to me:

I plan on investing in real estate in the coming years. If I were to finance a property for $150,000 next year and then immediately die after slipping on a banana peel, my future wife would be on the hook for the loan payments. Because I like her, I took out a $250,000 life insurance policy before I made the investment to protect her financially in the case of my death. She would have the money to not only take care of the outstanding debt from the investment property, but she would have money to cover my death expenses as well.

Take some time to learn about life insurance. There is an endless amount to know and it can have major implications as you build wealth in the coming years. Here are a few places to get started:

Newyorklife.com

Libertymutual.com

Prudential.com

Live differently, your bank accounts will thank me later.

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9 comments… add one
  • jim Feb 2, 2015, 11:48 pm

    Fifty thousand a month seem little high for a million dollar term policy… was that just a fat finger?

    • Millennial Money Man Feb 3, 2015, 12:41 am

      HA! Thanks for catching that. I’m sure an insurance company wouldn’t have pointed out the error 🙂

  • Kevin Jankowski Feb 17, 2015, 3:12 pm

    Can you explain the part where whole life can “hold a cash value”?

    • Millennial Money Man Feb 19, 2015, 1:23 am

      Sure! As you pay the premiums of these policies, a liquid cash value builds up that you can borrow against. It’s almost like paying into a savings account that you can borrow from if needed (you have to pay the money back with interest, but it could be cheaper than a regular loan). However, if you borrow from the policy it subtracts from the benefit that is paid out in the event of your death. For example – if you have a $100,000 policy and borrow $50,000 and then die, your family would only receive $50,000 from the policy. This cash value is built up because the insurance company invests your premiums as you pay into the policy. Here’s a good article for more info: http://www.moneycrashers.com/whole-life-insurance-definition/

  • Brian Apr 9, 2015, 12:36 pm

    A little late to the party but, if no one is on the hook for my debt, why would I take out a life insurance policy before I get married? I realize your premiums will most likely be higher if you’re older when you start your policy but, if you’re not married by the time your premiums increase significantly, is it really necessary?

    I suppose my parents being co-signers on my student loans would be the only reason to have life insurance.

    I believe that you should also add, most companies have some type of discounted life insurance policy for their employees based on multiples of their salary.

    • Millennial Money Man Apr 9, 2015, 7:49 pm

      You have a good point. In my situation, the life insurance policy would only be a way to protect my fiancé financially from my company. If you have nothing to protect…might not make much sense unless you are trying to pay into a policy that retains a cash value. I’ll look into the discounted life insurance policies, thanks for the tip!

  • Mr. Enchumbao May 6, 2015, 12:35 pm

    Hi, I thought about getting life insurance before but as my (millennial) wifey and I grew our net worth to a substantial amount during the past 4 years, we realized that’s the best life insurance we have for each other: Forever lasting FU money! Thank you for presenting this research and best of luck on your awesome new curriculum, outside of the typical classroom.

    • Millennial Money Man May 25, 2015, 12:13 pm

      Thanks buddy, life insurance is tricky. I’m a fan of doing it the way you are and building up cash (self-insuring). Keep up the good work!

  • Dane LaVigne Aug 19, 2016, 5:12 pm

    Anything can happen when it comes to the money you have saved up and the empire you are building. Things that took years to build can come crashing down in days. If you are young, there really isn’t any reason to not have life insurance, ESPECIALLY if you have a lot of money. If you are willing to spend $100 in a night going out to dinner, and you do it 4 times a week, there is no reason not to spend $50-$100 per month on a good life insurance policy.

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