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:
Live differently, your bank accounts will thank me later.
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