Getting life insurance is one of those things that all millennials should at a minimum consider. But very few of us have actually taken the step. We’re still young and invincible, right? And broke. Life insurance is another expense we don’t need to add to our budget.
According to a study completed by New York Life in 2018, only 10% of millennials have enough life insurance coverage. Based on the findings, millennials are dealing with a life insurance coverage gap of $352,000. Thirty percent higher than the next closest generation. What exactly does that mean? It’s the gap between the amount of money you would need to replace the breadwinner’s income and the amount of coverage you currently have.
The first question you need to answer when you decide life insurance is a necessity is how much coverage do you need? Do you want to provide your spouse with enough funds to live a life of luxury and never work again or just cover the basics? For most of us, we’re choosing option two. Not because we don’t love our spouses, but because we can’t damn well afford to let them live like Kanye when we’re dead. Sorry, not sorry.
So, the basics. The most significant expense will likely be paying off your mortgage. The last thing you want is for the surviving spouse to have to move out of the family home because they can’t afford it. Cover the mortgage, that’s not debatable. If you have children, you also need to provide for their care. Set aside enough so they can be raised how you want when your income is no longer in the picture. Life insurance is a tool to provide the life you had planned for your family even when you aren’t around to fund it. Maybe paying for your children’s post-secondary education is important to you? Include that amount if that’s the case. If you weren’t planning on doing that in the first place, then leave it out.
If your spouse has always worked, then it’s not unthinkable to assume they will continue. You don’t need to pay for enough insurance coverage for them to never work again. The general rule of thumb is to multiply your salary by the number of years you want to replace that salary. At the end of the day, this is a balancing game between current cost and covering a potential future loss.
The final thing you want to cover is the cost of your funeral. The average funeral in Canada costs around $8,500, but that amount can vary widely depending on your wishes.
I don’t have kids or a mortgage, do I still need insurance?
Honestly, probably not. The question to ask yourself is ‘who will be affected if I die?’ Do you have a partner who you currently share expenses with? Do you have debts that will need to be covered? Is there family who won’t be able to afford funeral arrangements? Depending on your answers to these questions, you may not need insurance at all, or you may need a small policy to cover funeral expenses or debts.
One thing to remember is that you may have a small amount of life insurance through your employer. Many employee benefits packages do have a life insurance component. Find out how much that is before making a final decision on personal life insurance.
The Health Factor
Insurance premiums are cheaper when you are young and healthy. You know, exactly when you think you don’t need insurance. It’s not a bad idea to get a policy sooner rather than later so you can lock in a low rate. The older you get the higher your premiums will be and the higher the risk you develop a health problem that will impact your ability to get coverage. A health scare can also make you ineligible for coverage, or make the premiums so expensive you can’t afford it.
The Two Types of Life Insurance for Millennials
Term Insurance (aka the only kind millennials need!)
There are very few situations where term insurance will not cover your bases. It’s simple and cost effective. Basically, you decide how much coverage you need, and you pay to have that coverage for a specified term. Usually 10, 20, or 30 years. But what happens if you die past that term? Nothing. You are no longer insured. The benefit of this is that it’s cheap, and will cover you for the period of your life when you need insurance.
When it comes to deciding on how long your term should be the guideline is until your mortgage is paid off. For most people, this will coincide with when children are moving out on their own, and you have enough saved for your spouse to live comfortably.
Let’s say you are 30 years old, own a home with a mortgage of $300k, have two kids, and are the breadwinner for your family. You are likely looking at an insurance need of at least $500k if you die. That’s right now though. If we flash forward 20 years you will be 50, and there’s a good chance you’ll have paid off that mortgage, your kids will be grown and almost wholly independent (fingers crossed) and you and your spouse will have saved up a decent nest egg for retirement. What are your insurance needs at that point? Likely zero. You need insurance to cover you when you’re building, not when you’ve already done all the hard work.
For $500k of life insurance for a 30-year-old non-smoker, you would be looking at a premium of about $25/month. Pretty inexpensive for the peace of mind it brings.
Permanent life insurance is precisely that; it stays in place until age 100. As long as there is no breach of contract, the insurance will pay out to your beneficiary upon your death. This sounds great, but it’s going to cost you in much higher premiums. For that same scenario, $500k of insurance for a 30-year-old non-smoker you will be closer to $200/month for permanent insurance. Yikes, I know. The one good thing is that you don’t pay that $200/month forever. Once you’ve fully funded (usually when you retire) the policy the premiums will stop, but you’ll still be insured.
That’s not to say that permanent life insurance doesn’t have its place, it does. However, that place is not likely coming out of the bank account of a 30-year-old millennial. It’s more of an estate planning tool for the rich. The advantage with life insurance is that the death benefit (the money that gets paid to your beneficiary) is tax-free. If you are looking for ways to pass on a sizable inheritance to your children, grandchildren, or a charity, then permanent life insurance can be a tax efficient way of doing that.
The most confusing thing about permanent insurance is that it includes an investment component. A portion of your premium will be invested. You can tap into that cash value if you need the funds, but it will lower your death benefit. If at some point you decide to cancel the policy, you’ll also be able to get a portion of your paid premiums back as the cash surrender value.
And the Bad
The problem with having your investments wrapped up with your life insurance company is that the historical rates of return don’t really justify it. Based on a 2015 study, those rates of return averaged between 2% and 3% a year. Considering you can park your money in high-interest savings for a similar return doesn’t make it super tempting. So why not go and do just that? Take the $200+ you’ll be saving by purchasing term insurance and start investing it on a monthly basis instead. We can call that the ‘create your own cash value’ system.
It’s really about the estate and tax planning benefits. If you don’t have those requirements, then term is where it’s at.
There are two types of permanent insurance you may have heard about:
Whole Life Insurance vs. Universal Life Insurance
There isn’t a huge difference between the two, but it’s important to know that if you hear either term, you’re being sold permanent insurance. Universal life policies are the more flexible of the two. You can increase or decrease your premiums, and you choose between a limited selection of investments. Whole life policyholders pay the same premium every month, and the insurance company makes all investment decisions. The cost for either will be in the same ballpark.
Where to Buy Insurance?
If I’ve convinced you to add life insurance to your financial toolkit, then let me give you one more piece of advice. Seek out an insurance broker instead of contacting a specific company or your bank. Insurance brokers will be able to provide you with quotes from various insurers. That kind of shopping around will ensure you get the best rate and the best coverage. Ask friends or family for a recommendation or head to good old Google to find someone local.
There are very few times where a permanent insurance policy is a better option than term insurance, especially when we’re talking about life insurance for millennials. Term insurance is cheap, simple, and will provide your family with the safety net they need if you are no longer around.
This post was proofread by Grammarly.