As a millennial, when is it essential to think about life insurance?
The latest Insurance Barometer Study of 2021 states 45% of millennials are willing to buy life insurance after the events of last year.
It's smart to seriously consider a game plan that will take care of your dependents and give you peace of mind that you will provide for them.
Your confusion about life insurance stops now, let's dive in!
What is Life Insurance?
Life Insurance is a contract you enter with an insurance provider wherein you pay a monthly amount, and they will hand over the value of the plan to your loved ones when you die.
It may sound like a morbid scenario with all this talk about death, but you can approach it this way.
You buy life insurance not because you will die but for your loved ones to go on living a life free from difficulty and struggle.
It is a small price to pay for you not to worry about your loved ones.
Life insurance includes terms you need to familiarize yourself with to understand the entire process.
- A life insurance policy is a contract between you and the insurance provider.
- Premiums are the monthly or yearly payments you make to own the insurance policy.
- Policy Holder is you, the policy owner.
- Death Benefit is the money you provide to your dependents when you die.
- Beneficiaries are your dependents, or whomever you choose to give part of the death benefit of your policy.
What Life Insurance Covers
Life Insurance takes effect as soon as the policyholder passes away, leaving a cash benefit to the beneficiaries or the dependents.
Then the beneficiaries get a cash payout computed to last the chosen term, whether it be sufficient for 10, 20, or 30 years after the death.
This allows your beneficiaries to make their own decision on how to spend the cash payout.
Income Replacement for Same Living Arrangement After Retirement
The cash payout primarily is an income replacement during the insured’s working years.
This payout helps pay off mortgages, car loans, credit card debts, and other financial obligations.
Another important aspect is for your dependents to continue with life after your death.
That means paying the utility bills, groceries, and other living expenses that the dependents live on.
The dependents need the income during the transition from the death of the primary wage earner to the insurance payout, which will allow the same living arrangement.
Babysitting and Childcare Costs for Stay-at-Home Parents
The arrangement with a stay-at-home parent allows free service of child care and babysitting costs while the parent is at home.
But if the situation changes with the need for the stay-at-home parent looking for a job, there are new bills to pay.
There are costs involved in childcare services, children’s activities, and babysitting services that are factored into the living expenses.
If the parent goes back to work, the child has to be supervised in a safe facility during working hours. That costs money and requires resources.
Smoothly Transfer Wealth to Your Dependents
Most of the time, the dependents comprise the spouse, children, sibling, elderly parents, and relatives. The insured is thinking of ways to smoothly transfer wealth to the dependents, taking out any chances of financial hardship.
Another expense after the death are estate taxes, that is settled with the government to avoid penalties and trouble with the government for undeclared dues.
The children still have school tuition fees and college loans to pay off.
Other expenses include bus fares, fuel and maintenance of the family car, and other miscellaneous items.
Handle Funeral and Burial Fees With Life Insurance
The costs of funeral and burial fees can be as expensive as $9,000, but life insurance handles the expenses with no burden to those left behind.
Having a funeral budget makes it easier to plan and fix the burial arrangements. There are two kinds of funeral plans included in life insurance.
- Burial insurance pays the death benefit policy directly to the beneficiary in the term policy or whole life policy.
- Preneed Funeral Insurance sets aside funds for your funeral before the need arises. It covers the standard funeral service, merchandise, church services, and burial services.
Life Insurance Coverage Rule of Thumb
Many would rely on the life insurance rule of thumb to get a rational idea of insurance needs and put value into them.
However, it is better than making an off-handed guess, but not accurate in measuring your financial life.
Buy 10x Your Income Plus 100K per Child for College Expenses
A parent’s death is a massive disruption for the children and plans for the future.
The rule of thumb is to compute your annual income multiplied by ten years.
Then add the college expenses of each child at $100,000, ensuring the college expenses are covered with the cashout.
The education of each child has a direct impact on your life insurance.
However, this rule doesn't account for food, lodging, transportation, and other miscellaneous fees.
Use DIME Formula to Look Closely to Your Finances
Debt and Final Expense, Income, Mortgage, Education or DIME formula makes you look closely at your finances.
Adding the four kinds of obligations gives you a clearer view of your needs, but it does not include your insurance coverage or savings.
Here are some additional factors in the unpaid contribution of a stay-at-home parent should consider:
- Debt and final expense add up all your debts and an estimate for your funeral expenses.
- Income is based on how many years your family would need support, then multiply your annual income by that number.
- Mortgage calculates the amount you need to pay off your mortgage ultimately.
- Education estimates the cost of sending your kids to school until they go to college or further studies.
Calculate How Much Life Insurance You Need
It’s impossible to calculate the exact amount of life insurance you will need, but you can make a close estimate.
Inspect your financial standing right now and imagine what your dependents or loved ones will need in the future.
Here is an easy guide on how to calculate your life insurance.
- Compute your income replacement value by using the value of your current annual salary and multiply it by the number of years you want to replace the income.
- Calculate your obligations by adding your targeted annual salary, mortgage balance, debts, future needs that include college expenses and funeral costs, and an estimated amount of childcare service if there is a stay-at-home parent arrangement.
- Add liquid assets that include savings, existing college funds, and existing life insurance.
- Subtract the total obligations of the liquid assets.
In case you want to calculate how much life insurance you realistically need, here is a more straightforward way to go about it:
- List down your resources that include your after-tax income and liquid assets of cash, checking, and savings account.
- Determine your financial obligation by adding all your expenses and debt.
- Compute your coverage gap by subtracting your financial obligations from your liquid assets. You should add the sum to this value for an allowance to the financial cushion.
Remember, life insurance takes care of your loved ones and takes out the heavy burden of worry on your shoulders.
Here are additional things you need to think about:
- Forecast your future expenses, future income, or asset growth.
- Do not make the mistake of estimating a smaller amount or skimp on the value, since a higher coverage considers the increase of your income and rise in expenses.
- Discuss with your spouse or partner how much the family would need to carry on with or without you.
- Study multiple life insurance policies instead of one comprehensive policy to give you room for changes in your life.
- If you are a parent, it is advisable to choose a 30-year term to give your children time to build their assets.
Life Insurance Calculator
The Life Insurance calculator uses both assets and debts as the basis for how much insurance coverage you need.
You can click online and have an online life insurance calculator compute how much insurance you should buy.
You will come across the following details you need to fill up: state, gender, birthdate, smoker status, and policy term length.
What Kind of Insurance Should I Get?
You’re probably wondering what kind of insurance to get since the policy seems similar with a few differences.
There are two kinds of life insurance to choose from, term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance lasts several years or term to cover a specific amount of time.
In the event of death before the full payment of the policy, the beneficiaries will receive the death benefit or the total policy.
It is affordable because of the simple plan of paying out the death benefit.
Permanent Life Insurance
On the contrary, permanent life insurance lasts throughout your entire lifetime.
Aside from the death benefit, it adds a cash value or investing your money to your policy.
The insurance company takes a chunk of your premium to invest in different financial instruments to grow the value of your premium, which is not significant in the overall total.
Complete Life Insurance
Complete Life is insurance that locks your premium amount as long as you want the policy.
A portion of the premium goes into a cash value that grows over the whole life policy, like a savings account.
You end up paying more for less insurance with the cash value earning very little.
Universal Life Insurance
Universal Life insurnace lasts your entire life and can go as old as 90 years old.
It has adjustable premiums wherein you can access some of the cash value to adjust yearly payments.
These premiums are divided into two parts, the death benefit and built-in savings and investment account policy that you can draw to offset premiums.
Variable Life Insurance
Variable Life Insurance combines a life insurance policy, a savings account, and a mutual fund all in one package.
It's more expensive but allows you to decide how to invest your cash value on stocks or bonds, or other investments.
What Will Life Insurance Cost Me?
Your life insurance depends on your family’s needs, as every person has a different setup or unique set of situations.
But, a safe estimate is to compute 10-12 years of your annual income on a level term life policy that lasts 20 years.
Using the 10-12 years' term assumes it will replace your salary in the event of death, but allows your family to live the same way as when you are still alive.
An example would earn a $50,000 annual salary on a 20-year life term insurance would require a $5-$10 per month premium payment.
That’s not so bad if you think of it as giving up a few days of coffee-to-go, right?
But this amount will ensure your family is taken care of in case of a tragic accident.
How to Decide if Life Insurance Is Right for You or Not
Opting for life insurance boils down to your risk tolerance.
It's not common to have $500K+ saved up to hand over to your family in case of a catastrophic event.
If you don't have large sums of money and assets it's a no-brainer to purchase life insurance so your loved ones don't have a financial burden in case of your death.
Do an Online Research to Explore Various Options
There are multiple life insurance choices available online, but the only way to find your best options is by doing research.
You’ll have to have check industry-funded groups under LIMRA or Life Happens on what it offered.
You can use online life insurance calculators to get an idea of the coverage.
Narrow down your list to the best-performing insurance companies with a stable financial background and a reliable history.
You do not want to invest your monthly premiums with a company that will not be around when the money is needed, right?
Shop With A Broker To Understand Your Options
You can easily buy life insurance online with no fuss or fanfare by simply clicking on the return button.
But, engaging the services of a broker or agent gives you a better perspective on the different types of options.
The broker will ask you a set of questions and will study other plans that you will consider.
A word of caution when using a broker or agent is to be clear on what you want and not allow the person to convince you of a higher plan.
Keep in mind that the broker, while helping you decide on a policy, earns on commission.
Take a Medical Exam Before Taking Decision
We have different health conditions and health issues that will affect the length of life.
Health risks to consider are diabetes, cancer, or any health concerns you're aware of.
Taking a medical exam gives you a clear picture of your health and forces you to change your lifestyle into a healthier one.
The results of the medical exam may not always be positive but are worth the effort.
Consider Getting a Temporary Life Insurance Before Final Offer
Getting temporary life insurance is a short-term coverage you buy while waiting to process your ideal insurance.
It takes five to six weeks for your policy to take effect.
You are allowed temporary life insurance before finalizing your final offer and making your first payment for the premium.
The temporary life agreement (TIA) is offered to applicants under application processing.
In the event of sudden death, the interim policy pays your beneficiaries.
This is the reason you can not buy a TIA separately but in the transition to your real-life insurance policy.
Offer Your Dependents The Best Financial Future
Buying life insurance must be viewed as a matter of life, not a matter of death.
You work and labor to give your family or dependents the best you can offer.
By paying a minimum monthly payment, you give yourself and your dependents a sizeable chunk of peace of mind. You take out the financial stress of funeral costs and estate tax dues to the government.
One of the perks of reaching financial freedom is being able to spend more time with your loved ones.
So, why not add this extra layer of protection for almost the price you'd spend on coffee each month?
How do I know if I need to get Life Insurance?
Life insurance is an important financial decision.
You protect the future of your dependents by giving them a cash payout that they can decide on how to use, whether it be to pay off mortgages, updating house bills, or setting aside the money for a college fund.
Whether or not you've accumulated a lot of assets, it's important to consider how you'd feel if your loved ones didn't have your financial support.
Odds are you'd want to help them and this is where life insurance kicks in.
How much will my spouse need for Life Insurance?
You compute income replacement by multiplying 10-12 years to your annual income, then add $100,000 per child for the college expenses.
List down all your living expenses and subtract from your liquid assets to arrive at a value. Use the 30-year term to ensure the kids would have grown and can fend for themselves.
At what net worth do you no longer need life insurance?
Having a high net worth does not mean you should not get life insurance.
The wealthy can maximize their wealth when computing for the after-tax assets, leaving more money for the heirs. The benefits certainly outweigh the cost of knowing their loved ones are protected in case of a catastrophic event.
Should You use Life Insurance as an investment?
Life insurance is a liquid asset and a practical business tool for business owners or individuals.
It is not counted as part of the estate and not taxed under the federal government.
Plus, you can buy multiple policies to meet different financial needs but may have to do medical examinations for each policy approval.
What happens if I don’t get enough coverage?
It is vital to compute accurately how much coverage you want to leave for your dependents.
Since you may get multiple life insurances, you study each one and get a new solid policy that will give enough coverage to your beneficiaries.
If you don't have enough coverage, your loved ones will suffer the burden of managing unexpected expenses.