This is life insurance 101 – written for those looking to buy their first life insurance policy.
Life insurance 101
You are a Millennial. You’ve launched your professional career and are building a solid financial house for yourself. Life insurance is part of the foundational structure of this financial house, along with your estate documents. Check out our short video on basic estate documents. Once you’ve read my post on life insurance 101 and established coverage, there’s no need to revisit your coverage until a life event takes place (marriage, baby, new mortgage, etc.).
Who needs to buy need to buy life insurance?
This is perhaps the most important question when it comes to life insurance 101. Some life agents will say “everyone”. In my opinion, you have a life insurance need when someone else is depending on you for a living. If you do not have other substantial assets, you probably need to buy life insurance. Let’s say you’ve got a new child at home – time to buy some life insurance. If you get hit by a bus this afternoon, how will your family get along without the income you provide?
There are many ancillary uses for life insurance (charitable giving and tax-free retirement to name two), but in this piece I just want to focus on the needs of your beneficiaries.
The cheapest kind of policy is term life insurance.
Term life insurance is simply a death benefit available for a term of years. You can buy it for 10, 20, or even 30 years. When you’re young it is cheap. If you’re a 30-year old and in good health a $100,000 policy costs less than $10 a month. Did your parents co-sign your student loans? If so, this is another circumstance where you absolutely need life insurance. If something happens to you, your parents, as co-signers, become responsible for those loans. They never go away either – they’re not dismissible in bankruptcy.
How much coverage do you need?
Well, let’s think this through. If you drop dead this afternoon in what circumstance will the people you leave behind find themselves? What other financial resources are available to them? Is there insurance on you at work? Do you have significant savings? Is there property that would need to be sold? All these things factor into the calculation. This is very much a personal choice, and I’ve got to tell you after many years in the business I think I’ve probably heard everything. Once a man told us he wanted enough to fund everything for his widow through her retirement years, including funding the children’s education. He wanted enough money provided so that, when invested, the income could cover everything and she’d never have a financial worry again. Another client told me that his wife is a beautiful woman, and that in all likelihood she’d remarry within a few years, so that’s what he wanted to provide – a few years’ worth of income, to last until she remarried. There’s no right or wrong answer here, but this is something that you need to think through.
What kind of insurance should you buy?
Initially, term insurance is usually what we recommend. We want to see you fully fund your emergency fund, get retirement savings on track, and follow a plan to liquidate your student loans before considering any sort of permanent policy. In a few years down the road, then, you may consider cash value life insurance options if appropriate.
How do I buy life insurance?
You complete an application with a broker or agent and a medical examiner will see you at your convenience to complete a form and draw blood. You’ll also give a urine sample, and perhaps take an EKG, depending upon the insurance amount. You’ll get your formal offer of insurance a few weeks thereafter.
Bottom line: we urge you to do the responsible thing in securing life insurance as part of the foundation of your financial house. This is especially true if someone else is depending on you for a living. That’s the life insurance 101.
Jonathan Cameron is a Co-founder and CERTIFIED FINANCIAL PLANNER™ at CameronDowning, a Registered Investment Advisory firm that works with young professionals. He provides targeted financial advice to young professionals on building personal wealth, student loans, employer benefits/401ks, planning for a first home purchase, estate planning, and basic insurances. He lives and works in Miami, FL. Check out his YouTube channel where you’ll find dozens of short videos crammed with most of what you need to know to establish a strong financial foundation. Also, be sure connect with him on Facebook, Linkedin, and Twitter.