What Kind of Life Insurance Do I Need?
November 23, 2015
child holding parent's hand

A guide to buying life insurance for recent college grads, millennials and young people.

As a young person just starting out in your career, yes, you absolutely should consider purchasing at least some life insurance. The reason isn’t so much to cover your student loan balances (Sallie Mae debt under the Smart Option program is forgiven at death, anyway), but to protect your family, or future family, against the loss of your income.

If you’re young and in reasonably good health, as most recent college graduates are, you should be able to purchase a very large amount of life insurance protection for very little money. We’re talking $50 per month for $1M in coverage from many term life insurance companies for healthy people in their 20s and early 30s. Really: For healthy young people, you can buy ten years’ worth of your current income for not much more than pizza money, in most cases.

Here’s what to keep in mind when you go shopping for life insurance.

  • Life insurance is primarily a protective measure, at this stage of your life, not an investment. The most important thing right now is to get adequate protection in place while you are still healthy, at a premium you can afford. Everything else – cash value, living benefits, riders, estate planning, etc. pales in comparison.
  • Some life insurance companies advertise ‘no medical exam’ required. These plans attract sick people. Life insurance is medically underwritten. If you have to submit to a medical exam – or at least have a nurse come by and look at you and take your blood pressure and a blood sample – that’s almost always a better deal. Especially if you are in decent health.
  • If you smoke, quit. Life insurance is much more expensive for smokers than for non-smokers. But don’t put off getting protection in place for your family just because you think you can buy it cheaper after you quit. Get the coverage in place. Then quit. After 12 months, re-apply as a non-smoker and get the lower rates.
  • Buy convertible term insurance first. Salespeople may try to sell you whole life, universal life, or various forms of cash value insurance. They are all terrific products in their place, but premiums are higher when you’re young.
  • The term “convertible” means that you have the right to convert some or all of your term insurance – insurance that is designed to expire at some point in the future – to permanent insurance that is designed to last until you live to be 120 years old, in some cases. You can do so without medical underwriting.
  • Some companies offer this option, and some don’t. Some have no permanent life insurance products for you to convert your term insurance to.
  • However, since you have the right to convert your policy, or a part of it, there’s no reason to wait until you can afford some fancier, higher-premium insurance policy with bells and whistles. Buy the protection you need in a term policy, and figure the rest out later, and convert if you want to or need to. You have time.
  • You want guaranteed renewable life insurance. That is, insurance you have the right to renew at the end of the initial term, regardless of your medical condition at that time. With a guaranteed renewable policy, your life insurance company can’t drop you at the end of the term if you get sick. That’s the last thing you want to happen.
  • You can ‘lock in’ rates one year at a time, or lock in a level rate for five years, 10 years or 20 years, depending on the company. The company cannot raise your rate until the intial term is up.
  • Some popular financial media personalities, including Dave Ramsey, advocate locking in very long terms, like 20-year terms. However, shorter terms cost less out of pocket now, early in your career. The longer the term, the more the pricing approaches that of cash value insurance, which Ramsey detests, without the cash value benefits. Consider saving money with annually renewable (1-year term) or 5-year terms. If your expected need is much longer than 20 years, you may be better off looking at cash value insurance.
  • Most policies allow you to buy a premium waiver rider. This pays your insurance premium for you in the event you become disabled and you can’t work. It’s usually only a few dollars per month, but it protects you. If you got cancer and got so sick you couldn’t work anymore, the last thing you would want to happen is to have your life insurance lapse, too, because you can’t pay your premiums.
  • Some policies let you buy a rider that doubles your payout in the event you die of an accidental death. You can take the few dollars per month that this costs and just buy additional term insurance. However, if you race cars, surf monster waves, go hang gliding, skydiving, helicopter skiing or mountain climbing, or you have other dangerous hobbies, or you have a hazardous job like lumberjack, commercial fisherman or ice road truck driver, you may want to check this block.
  • If you’re in the military, ask your agent about whether your policy excludes death from acts of war or in connection with military duty. You want a policy that pays out even if you die in the line of duty, whether in the U.S. or on a deployment, and whether you’re active or reserve component. Your spouse and children will have the same bills regardless, without your paycheck, so you don’t want that exclusion.

How much life insurance should I own?

There are a few rules of thumb in common usage. Some say you should own 10-12 times your current income.

But look at it this way: With interest rates hovering around 5 to 6 percent these days, in relatively safe investments, your beneficiary should be able to get $50,000 to $60,000 per year for every $1 million invested, without spending down principal. If you want to replace your current income for your family, even if you never get another promotion and you never get another pay raise, you need to sock away a lump sum of nearly 20 times your current income. If you only got 10 times your income, 5 percent of that lump sum per year you receive in interest would only replace half of your income.

If your income is in this neighborhood, $1 million is a very reasonable amount to own – especially in your 20s and 30s. As you get older, you won’t be able to qualify for as much life insurance as you did when you were younger and all your earnings years were ahead of you.

If you can’t afford the premiums, even on 1 year or 5 year term insurance, then just buy what you can afford, and add to it later.

The rule of thumb I would suggest is this: The amount of life insurance you should own as a Millennial, just starting your career, is whatever amount you can easily afford. Buy that much, and there’s no reason to put it off.

What if I don’t have a family yet?

It’s your job to protect your family. No one else will do it for you. Adequate life insurance is foundational. Don’t have a family? Buy it for when you do. There’s no guarantee you will be able to qualify if you wait until you have a family. Meanwhile, you can name your parents as beneficiaries. If they cosigned for any debt, they will appreciate your foresight. For example, if your parents cosigned for you for a car loan or private student debt, even after you died, they’d still have to pay the bill. Naming your parents/cosigners as beneficiaries protects them – and the amount they would receive will help them hire the help they need as they get older that you won’t be around to provide.