Nobody likes to think about dying, especially young people in their 20’s and early 30’s who have their whole lives ahead of them. But the fact is, some people die of unexpected causes at a young age. If you’re a millennial with a spouse and family to protect, now is the time to look into buying a life insurance policy. Failure to do so could put your loved ones at financial risk if you were to die before your time.
There are many types of life insurance policies for individuals. The three most common are term, whole life and group insurance. If you’re just starting to explore the ins and outs of life insurance, here’s what you need to know about each.
Term Life Insurance
Term life insurance is the most basic type of life insurance coverage. It has one primary purpose, and that’s to protect your spouse and/or dependents if you should die prematurely. You pay the insurance carrier a monthly premium for the policy, although payments can usually be made quarterly, semi-annually or annually. If you die while the policy is in effect, the carrier pays your named beneficiaries a preset sum of money, called the “death benefit.”
When buying a term life policy, you get to select the length of the term. Common terms include 10, 20 or 30 years, but most carriers are flexible when it comes to setting the duration Term life offers two important advantages over other types of policies. It usually costs less, making it more affordable. Also, the premium usually stays the same throughout the life of the duration, which can be especially beneficial when buying the policy at a young age when you’re in good health.
Term life policies are best for providing coverage for a specific amount of time; for example until you retire or the children become adults and move out on their own. The key is to make sure you buy enough insurance that the death benefit will replace your income (or close to it) so your family can continue living a comfortable lifestyle. A simple way to determine the amount is to ask, “How much would my family need if I was no longer around to provide for them?”
Some people opt for a larger amount so their loved ones can pay off the mortgage or provide for the children’s college education. It all depends on how much you can afford each month and how long you want the coverage to last.
Whole Life Insurance
The next step up in life insurance policies is called whole life insurance. It is designed to be a permanent policy that stays in effect until the day you die, regardless of your age at the time. It costs more than term insurance, , but it also offers important financial advantages.
In addition to the policy’s death benefit, whole life includes an savings component called “cash value”. As you pay the premiums, your policy accumulates a cash value over time (the rate of accumulation is spelled out in the policy). Moreover, the growth in cash value is tax-deferred, meaning you don’t pay taxes on it as it accumulates.
You can borrow money against the cash value, or you can surrender the policy for the cash. However, failure to repay a cash value loan (with interest) will reduce your death benefit. If you surrender the policy you’ll receive the cash value in payment, minus any outstanding loans, but your life insurance coverage will no longer be in effect. Some whole life policies pay annual dividends, which you can take in cash or add to the cash value of your account.
Whole life works best when you want a guaranteed death benefit payment. The money can be put to many different uses, including:
- A nest egg for your surviving spouse
- Paying estate taxes
- Providing for a lifelong dependent, such as a child with special needs
- Setting up a trust fund for your adult children
Group Life Insurance
Group life Insurance is typically offered by an employer to employees or to members of other types of organizations, such as labor unions or industry associations. The organization buys the coverage wholesale from the insurance carrier, and can therefore offer the coverage at a reduced price. The employer/organization retains the master contract, and employees or members receive a "certificate of credible coverage".
Many employers provide a small amount of life insurance coverage for free as part of their benefits package. Coverage for this “basic” group life is usually limited to $25,000 or $50,000 (except for highly paid executives). But since employees do not pay for it, there’s no reason not to enroll in the group plan.
Group life insurance is known for its convenience, cost and acceptance, and can often be the easiest way to provide some level of protection for your spouse or family. If the organization charges for the coverage, the rates can often be lower than purchasing a policy on your own. Also, people with serious medical conditions may qualify for better rates than buying an individual policy.
On the downside, life insurance obtained through work usually doesn’t offer the same range of policy options available with individual policies. However, the opportunity to purchase low-cost life insurance should not be passed up, especially for millennial's with growing families and limited funds to afford that kind of financial protection.
If you’re not sure about buying group life, at least take the free basic coverage if your employer offers it. If your employer charges for the coverage, shop around to see if you can find better coverage at a better price. Either way, providing financial security to your family through a life insurance policy is one of the best decisions you will ever make.