Do I Need Life Insurance?

Do I Need Life Insurance?

Should Millennials buy life insurance in their 20’s & 30’s?

 

Life insurance has been around a long time and has provided countless families and businesses with peace of mind and financial security.  The question, “do I need life insurance?”, is something I get on a regular basis. It is one thing if you are married, have kids, a home with a mortgage, or a business since it is easy to make the mental connection to protecting those things with life insurance.

But what if you are in your 20’s & 30’s like so many millennials are and don’t have all those responsibilities in your life yet?  Do you still need to get life insurance, or should you put it off till you are older and have a clear need for it?

The following reasons for buying life insurance at a younger age will hopefully give you some context and logic on why it makes sense to buy it early, before you need it.

Do you need life insurance if you have no dependents?

Technically, no.  

Life insurance planning is like skating to where to the puck is going, not where it is.  You get it for what will happen in the future. Sorry folks, but unless you have found the fountain of youth, we all do die eventually.  The crux of it all is you just don’t know when your time is up!

But let’s think about this.  You are single, no kids, no mortgage, but probably have some student and credit card debt, maybe even a car loan.  If you get hit by that bus going around tomorrow do you want to negatively impact others by not paying off your debts?  Remember, when we take out debt whether it is a student loan, credit card, car loan, etc. we are making a promise to pay it back.  Sure, if you die unexpectedly you won’t care anymore but do you want to leave others shorthanded since you didn’t have a plan to pay back your obligations?  Even if your debts may be forgiven do you really want to negatively impact those that lent you money?

There is another angle to take on this.  Do you plan on getting married? Having kids?  Buying a home and taking out a home mortgage? Starting a business? Being the sole wage earner for your household?  If so then you would certainly consider life insurance, wouldn’t you? Remember, where is the puck going? Of course, you would!  But what if you couldn’t get it?

 

Life Insurance Medical Exam

You buy life insurance with your health; you pay for it with your money.  What do I mean by this? Well, for those of you who don’t have life insurance let me tell you how you actually buy it.  To qualify for most personally owned life insurance you need to go through underwriting. The process and requirements can vary but typically you need to complete a medical exam in order for the life insurance company to assess your mortality risk.  If they are going to insure your life, they need to make sure they are taking on a reasonable risk thus they have to underwrite your health. If you are in bad health, then the life insurance will either be too expensive to purchase, or you may not be able to get it at all.

Given we all tend to be healthier the younger we are it is easy to make the argument for buying it as young as possible.  Sure, you can make the argument that you have to pay premiums for the life insurance, and wouldn’t those dollars be better spent elsewhere?  Perhaps, but given how inexpensive life insurance is these days it is hard to argue. I have helped clients secure life insurance for less than 50 cents a day.  Are you really going to miss this amount of money? Isn’t the peace of mind and knowing you are planning for the future worth such a small amount of money?

Do you need life insurance if you have no debt?

I have worked with a number of clients who have no debt yet they still ended up implementing a life insurance plan.  Why? Well the reasons vary widely from things like replacing income to estate planning, but essentially it is to replace your most value asset, you.

Your ability to get up every morning and go to work, or build your business, and generate an income from your actions is arguably your most valuable financial asset.  Without you none of the other things you want to do in life are possible.

• Want to save for retirement?  You generate the money that gets put away into retirement plans like your 401k and IRA.

• Want to pay for your kids’ college education?  You generate the money to save in their 529 plan. 

• Want to take your family on an annual vacation?  You generate the money to pay for these trips.

• Want to make sure your family has three meals a day?  You generate the money to pay for all this food.

I think you get the point here, just because you don’t have debt doesn’t mean you don’t have financial obligations to think about and protect.  If you are not here tomorrow who is going to pay for all these things and more? Winning the lottery is a bad plan. Or perhaps your in-laws will take care of your surviving spouse and kids, do they know this is your plan?  I bet not!

How much life insurance do you need?

Be careful here.  There are so many ways to calculate the amount of life insurance you may need.  It has been my experience, through having met with thousands of people and assessing their life insurance, that most people are under insured or have been sold the wrong type of life insurance for their current financial situation.

Obviously having some life insurance if better than nothing, but life insurance planning should be done in concert with the rest of your financial planning.  Why, because they are all connected. Life insurance is simply the bucket of money you own after you die. It is easier to understand the value of life insurance when we forget it is called life insurance for a moment and focus more on what it does.

How much life insurance you need is unique to each person and family situation so make sure to stay away from rules-of-thumb or quick calculators.  It is of great importance that your life insurance plan be designed specifically for you and your needs.

I wish I could give you a simple answer or formula for figuring out how much life insurance you should have but that simply would be doing you a disservice.  Take the time to figure this out with a professional that can assess your life insurance needs as part of your overall financial plan.

 

How does life insurance fit into financial planning?

Life insurance can and should be considered a cornerstone and/or foundation to any financial plan.  When you start construction on a house you don’t start with the master bathroom, you start by putting in a strong foundation to build everything else on top of.  The same should be done for your financial plan. Your life insurance plan is that strong foundation.  

In other words, you should be planning for the worst but hoping for the best.  Of course, we want you to live a long and fruitful life but none of know when our time will be and if tragedy strikes and we die early than doesn’t it make sense that we have planned for it?  Given how little it costs to get a life insurance plan in place it is hard to make an argument for delaying it.

As part of the financial planning process there should be a thorough analysis done of all your insurance needs, including your life insurance.  When working with a financial planner make sure they are addressing your insurance needs just as much as your retirement & investment needs.

How do you buy life insurance?

Given all the technology enhancements we benefit from it has become much easier to buy life insurance.  For example, I run a virtual financial planning practice where I help people all over the country address their financial situation and help them implement plans to realize their hopes, dreams, and goals for the future.  I do all of it virtually. So, when a client needs life insurance we are able to design a plan in real time and then apply for it and never have to print off a single piece of paper.

Sure, there are vendors out that where you can buy life insurance after answering some online questionnaire and then be “insured” instantly, but is that really how people want to purchase such a personal thing?  In my experience, no. People want the convenience of doing things online but still value and need the personalized advice from professionals who understand all the aspects of life insurance and how it fits into a financial plan.

When buying your life insurance it is very important to make sure the life insurance company you are doing it through will actually be there to pay the claim in the future.  Yes, technology can make the process easier and faster, but make sure you are not sacrificing the quality of the recommendation or life insurance company in the process. Working with a virtual advisor can be a nice alternative to still benefit from the ease of doing it online but making sure the life insurance plan is designed by a human specifically for your needs.

 

Let’s face it, the topic of life insurance is not exactly a fun one to talk about!  I hope you have learned more about it and if it makes sense for you to buy it as a young adult.  Please drop me a note with any feedback or questions you may have.

Thank you for reading!

Cheers,

Derek