Life insurance: a subject that the majority of us millennials have heard of, yet most have never seriously considered partaking in themselves. First, what is life insurance? While it’s a common conversation, particularly around older such as our parents, many people aren’t sure what exactly it is and why they would ever need it.
This article will cover life insurance at a high level, what it is, why we should get it even as millennials and how to go about opting in. As a disclaimer, we do not sell life insurance nor are we licensed to sell it. We are simply raising awareness about it in hopes of educating more millennials toward making the decision to get a life insurance policy that will one day save their families if something bad does happen.
Personally, we have life insurance as well as disability insurance. We will talk more about what disability insurance is and the importance of it in another article.
Our personal background (why do we have life insurance)?
We haven’t always had it. I recently changed jobs to work for one of the largest insurance companies in the world, and as part of my package, I had the option to opt into a variety of benefits such as life insurance, disability insurance and had the choice of supplemental insurance beyond what my company was willing to pay out to us.
Supplemental insurance in the above context just means additional insurance beyond what is provided.
After seeing how cheap it was, I decided to elect into the maximum amount for each category. Now, I obviously don’t plan on dying today, tomorrow or any time soon. I also don’t plan on being so sick that I need to go beyond my paid sick time. However, you never know. So, we are paying something like $50/month for an incredible amount of coverage just in case something awful happens to one of us.
For us, it’s great because it allows us to sleep better at night knowing that if something ever happens to one of us, the other is well taken care of financially.
What is life insurance?
Life insurance is an insurance policy that you buy for yourself that is designed to protect your family if ever you should meet an unfortunate early demise.
Why is it called life insurance?
Life insurance does not insure you of your life as the word might imply. It doesn’t somehow give you insurance to life or that you won’t die. This may be obvious to some but needs to be said as a point of clarity.
However, life insurance ensures that your loved one’s lives will not be altered financially due to your early demise. That your children will still be able to get their college education, that your spouse will still be able to afford their mortgage payments since you are no longer alive to cover your portion of the payments or the bills. Thus, it is important that you first sit and figure out how much money you will need in order to cover all your debts and also for your survivors to keep their standard of living if you were no longer alive. Multiply that monthly amount by 12, then multiply it by 20.
One way to calculate how much life insurance you may need
If you want to know how much it costs to buy life insurance, and you are between the age of 25-35 years old, do the following:
- Total Debt: Figure out how much total debt you currently have.
- Monthly Expenses: Figure out how much money you contribute to bills and other family expenses.
- Multiple: We chose a multiple of 20 as a general rule of thumb.
- Annual Expenses: Take your monthly expenses and multiply them by 12 to get your annual expenses.
- Final Insurance Amount: Take annual expenses and multiply by the multiple of 20 (step 3).
Your “Final Insurance Amount” is how much you should be looking to have your policy declare as the payout amount. So, in the event of your early demise today, that amount when paid to your family should take care of them.
Is life insurance expensive?
No, it is very affordable. It can cost as little as $8-$10 per month for a benefit payment of $100,000+.
Who gets the payments from my life insurance policy?
Buying life insurance is one of the most unselfish things you can ever do. As you’ve clearly gathered from the above explanation, it does not benefit you personally in any way shape or form. It benefits the people around you.
So, who gets the payment from my life insurance policy? The money you get from your life insurance policy goes to your beneficiaries. Put simply, a beneficiary is a fancy term insurance companies use when talking about that special someone or people that you leave behind after you die.
For example, your husband/wife (spouse) is usually your immediate beneficiary, unless certain conditions were taken to prevent him/her from being that special someone that receives the “beneficial interests.” I put beneficial interests in quotes because it’s not like any amount of money is enough compensation for the death of someone you deeply care about. But unfortunately, that is what it is called in the insurance world.
Definition: Beneficial interest – in this example, the right to receive payments from someone who died that included you as the person to benefit or collect payments from an account or policy payout.
If you aren’t married, another example of a beneficiary can be your mother, father, brother, sister, etc. Basically, anyone whom you deem most special to you that you think would take the proceeds from the policy payment and use it to make the life of those you care about easier financially.
Whether it be to pay for future college education of a son/daughter/niece or just to help with potential burial costs, or to make sure your parents are well taken care of when they are old and need to be in a nursing home and you are no longer around to ensure their comfort.
What if those I care about don’t need financial support, should I still get life insurance?
Yes, you should get the minimum amount of life insurance that would at least pay for your burial costs and any potential debt you leave behind. Those costs and debts could land on your next of kin and even if they are well off, why force them to dip into their personal savings in order to cover your personal credit card/ mortgage and burial costs? Would that be the right thing to do if you knew you could keep it from happening?
Definition: Next of kin – this is usually your closest living blood relative. Could be your father, mother, brother, sister or cousin. Your next of kin is usually not your spouse due to the true definition of the word however, there are some conditions where they can be included as “next of kin” which we will not discuss here.
Life can be highly unpredictable and life insurance is not something we think of ever having until we hear of how someone had it and it saved their family from potential homelessness/hardship or other horrible fates. Or when it is too late and had we foreseen the future, we would have thought to get it.
Don’t wait on getting life insurance until it’s too late and you can’t. Unfortunately, unlike other things in life, you only get one chance at getting life insurance when you really need it. Once you’re gone, your chance is also gone to protect and provide for your family.
Below are some of the most common questions around life insurance along with our answers to each question. Our goal is to make sure that you fully understand life insurance and why we think it is a good investment to make:
Is it a good idea to have life insurance and is it worth buying?
Absolutely! It is definitely a good idea and very affordable. It can cost as low as two cups of coffee from Starbucks as a monthly payment with a benefit payment of $100,000+. How is that not worth it?
Do I really need life insurance?
If you are still asking this question, you need to go back and re-read this article and read the question and answers below!
What are some of the life insurance options?
- Term Life Insurance for a specified period of time
- Lifetime protection with Whole Life Insurance
- Flexible premiums and optional guarantees with Universal Life Insurance
- Protection and investment options with Variable Universal Life Insurance
At what age should I get life insurance?
You should get life insurance as soon as you can afford it. It is very hard not to be able to afford paying a cost as low as $8/month for a life insurance coverage that will payout $100,000+ upon your death.
Where do I get life insurance?
From a life insurance company with strong credit ratings. See a list of some of the reputable life insurance companies below.
When is life insurance not worth it?
It is always worth it. You just never know what life may bring your way. You could be the world’s richest man and tomorrow be worth nothing and get hit by a car. Life is unpredictable. Buying insurance for yourself/family and your health should never be ignored!
What do I need to do to get life insurance?
Get on a computer, Google “life insurance,” choose one of the highly rated insurance companies, go through the process of filling out forms and questionnaires then submit the form. After all is complete, you will be paying a monthly payment based on the benefit amount you chose. A benefit amount is the amount you elect to be paid out after your death.
Do I need an agent to buy life insurance?
No. In today’s digital age, you can buy life insurance from the comforts of your own home. Many insurance companies have been moving with the digital age. Simply look up “life insurance policies” and you will get a list of possible insurance companies to buy affordable life insurance.
Choose the insurance companies that are well-known and highly rated by Moody’s, S&P or Fitch. If you haven’t heard of the company before, don’t buy from them. See below for a list of companies we know to be reputable. As a disclaimer, we do not take any responsibility for your choices. Always do your own research before choosing any investment. This includes your choice of a reputable life insurance company.
What are some of the top highly rated (reputable) life insurance companies?
- Haven Life
- Liberty Mutual
- Northwestern Mutual
Note: The above list is not in order of financial strength.
Can my beneficiaries be multiple people?
Yes, usually as a benefactor, you can put more than one person as a beneficiary and can determine what percentage goes to each person.
Is life insurance a scam? How do insurance companies make money if my monthly payments are so small compared to the policy payout amount?
No, life insurance is not a scam. Insurance companies make money due to the law of large numbers and life expectancy. An insurance company knows that on average, everyone in their life insurance pool won’t die at the same time, so they will never need to pay out hundreds of thousands of dollars all at once.
Also, they know that the average person in the United States has a life expectancy of 80 years old. Life expectancy roughly means the age you are expected to live to before you kick the bucket. So, for a life insurance company, they don’t expect a 30-year-old today, to need the benefit payments until 50 years from now.
On average, that is true. In fact, some will pay for life insurance but live well beyond 80 years old. Others decided to not renew the policy or end up getting rid of the policy altogether for whatever reason. In this case, the life insurance company would have made a profit from that policy because they would never have needed to make any payments to beneficiaries.
But as an individual buying life insurance, you can’t be thinking like the insurance company. By buying life insurance, you are essentially hedging your bets that you may live till you are 80, or you may meet an early demise. By not buying life insurance, you are effectively saying that you know with 100% certainty that you will live until you are at least 80 years old.
Now, it’s great to be optimistic like that, but foolish to think that there is no chance that an accident could occur out of your control that could possibly end your life too soon. Buying life insurance is one of the most grown up things one can ever do. It is a morbid subject but one that needs to be addressed especially early on in your career.
What is a benefactor?
You may have heard this term before. In the term of life insurance, the benefactor is the owner of the life insurance policy. So, if you buy a life insurance policy for yourself, you are the benefactor. The person that will receive the policy payments after your death is called the beneficiary.
What is an insurance policy?
An insurance policy is a contract between the benefactor/ the person being insured (the insured) and the insurance company (also known as the insurer). The insurance policy will pay out an amount to the beneficiary of the policy (contract) during the term of the contract.
What is the term of a contract?
As it pertains to life insurance, it is the length of time specified in the contract that the insured is covered for. If the term of your contract is up and you do not renew your contract, your beneficiary will not receive payments after your early demise.
You have to be covered and making payments towards your insurance coverage in order for your beneficiary to receive payments inside the term of the contract.