If you have ever read my blog before, you know that as a financial planner, I value life insurance as an integral part of my clients’ financial lives. Before training as a financial advisor, I honestly never gave much thought to life insurance. However, now I know that it’s a valuable tool to help protect you against certain financial risks.
While I value life insurance as a smart way to financially protect your loved ones, I don’t value it for every client; and for the most part I rarely recommend it to my Millennial clients.
What would happen if you weren’t around?
Before you can even begin to wonder if life insurance makes sense for you (no matter how old you are), you need to go through the morbid process of imagining a world without you in it, and what it means to the people you leave behind.
Yes, many people will miss you, maybe some people will rejoice and for others, it will not make a difference in their day-to-day lives. For most Millennials, the primary ‘risk’ to their departure from this world is emotional, and while life insurance can prevent a number of risks, it can’t solve the emotional dilemma of losing a loved one.
I analyze risks in my clients’ lives all of the time, and for Millennials the biggest risks are usually not having enough in emergency savings, too much debt or not investing properly. I usually see minimal risks for my Millennial clients that life insurance would solve. There are a few situations, though, where I have found myself suggesting life insurance to a Millennial client.
Debt upon death
What happens to your debts when you die?
During a meeting with a one of my Millennial clients earlier this year, she lamented the fact that she recently lost a friend at the young age of 26 and how his death acted as a wake-up call for her to lead a healthier lifestyle. His early departure also led her to the exercise of wondering what life would be like if she were gone; and she immediately worried about her student loans.
This client currently has over $120,000 in student loan debt that she is paying off. Her parents are co-signers on all of these loans and should this client pass, her parents would not only suffer the pain of losing a child but they would also bear the burden of $120,000 in student loan debt that she would leave behind.
Unfortunately, this is a scenario that many Millennials are facing. They have significant student loan debt that would cause a serious burden on their parents should they pass away suddenly.
Unless this client wins the lottery, her student loan debt represents a risk upon her death for the next 10-15 years, and I suggested she look into a term life policy to cover this risk. Term life insurance monthly premiums vary by your age, your health and the term, but for her situation and the coverage she needed, she was able to secure a policy for only $12 a month. As she said to me later, “Shannon that’s two less Starbucks lattes I get a month, but at least I know it will protect my parents should something happen to me.”
If you’re curious how much it would cost you, find out here.
Life insurance that's actually simple.Estimate your rate
The Typical Life Insurance Needs
I think most people realize that they have a life insurance need when they go through life events like getting married and having children; I typically advise Millennial clients in these situations to make sure they are protecting their loved ones with life insurance.
In my opinion, getting married doesn’t instantly make you a life insurance candidate. I have clients who are married with minimal debts and substantial savings that feel prepared should one of them die suddenly, so the extra monthly expense of life insurance doesn’t make sense.
However, I do feel as though as soon as you have a child, you have to think about protecting that child should something happen to you. Even if you have a significant amount saved, you don’t know what added expenses could arise when you pass and you don’t want your partner to clean out their savings to cover it. Perhaps the surviving parent will not be able to return to work, or your assets aren’t as significant as you assumed, and the nest egg depletes faster than anticipated.
When I worked at Merrill Lynch, another advisor’s client passed without having life insurance, leaving the surviving spouse and two small children with minimal cash and three real estate properties. It was going to take her time to sell those properties for cash and she didn’t know what she would live off of in the interim.
The younger and healthier you are when you apply for term life insurance, the lower your monthly premiums. However, it only makes sense to buy term life insurance when you actually have people who are financially dependent on you to pay the bills.
Financial dependence could exist when:
- You’re married and your spouse relies on your income to help with paying the bills or paying down debts like a mortgage
- You have children and your spouse can’t afford to take care of them and cover all expenses (think about college!) without you around
- You have significant co-signed student debt that would be left to your loved ones (likely your parents – don’t do that to them)
None of us has a crystal ball and rather than assume your loved ones will have enough assets to keep them comfortable without you around, life insurance can assure that you don’t have to worry about that scenario.
If you’re still not sure if life insurance makes sense for you, here is a great calculator to help you through the exercise.
Do you have risks?
As a financial planner working with mostly Millennials, I think the greatest risks you need to protect against are the financial well-being of a partner or child and debts upon death. If your death would create a substantial cash drain for someone they love, then you should consider term life insurance as a potential solution to ease those risks.
Otherwise, I would suggest using that additional monthly payment toward other life goals or to indulge in an extra latte from time to time.
This post originally appeared on Financially Blonde. Shannon McLay is a financial planner and the blogger behind Financially Blonde. Her work is focused on helping people in their 20s and 30s get and stay financially fit. Don’t miss her sassy and smart podcast about money.