Next Level Adulting Part One: Life Insurance
This one is all about life insurance, in a very introductory way. We will talk about what life insurance is, why you might want to have it, the various types, and a tiny bit about how to find a policy.
First of all, what is life insurance? Life insurance is an insurance policy (a contract between the insurance company and the policy owner) which provides a death benefit (payment) to beneficiaries (people the policy owner chooses) when the policy owner dies. It’s like car insurance — but for a person, in that you pay it every month, and you hope to not have to use it. Many of the articles and books that I’ve read suggest your total amount of life insurance be 8-10x your salary (so if you make $100,000 per year, you should have $800,000 - $1,000,000 of life insurance). Depending on your finances or cost of living, this might be too much, or not enough, so plan according to what’s best for your own life! (Just remember that more coverage comes with higher cost and possible complications, like needing to have a physical done first.)
The major reason to have life insurance is so that your surviving loved ones aren’t financially burdened if you pass away. Many financial gurus advise people to think of life insurance as income insurance: if there’s someone who is dependent on your income, you should have it. This could be a spouse, children, other relatives that you may care for or support financially, a business partner, etc. The goal is that your death doesn’t trigger a financial catastrophe for your people who will be already struggling with the grief of losing you. As a result, many people tend to purchase a life insurance policy when they get married, or have children, or even make a big financial shift like buying a house (with a mortgage) or starting a business.
There are two major types of life insurance that you’ll hear folks talk about: term life insurance, and whole (universal) life insurance.
Term life insurance is life insurance for a defined period, called a term. Usually this can be 10, 20, 30 years, etc. What happens here is that you decide what term you want, and then you pay the premium (monthly/annual fee) to have insurance coverage for that time period. When the time period ends, the policy expires (as long as you don’t die first).
What some people do as a strategy is layer term policies, according to their changing needs and lifestyles. This is For example, let’s say you get married at 25, and you decide to buy a 30 year term policy for 5x your salary (so $50,000 salary = $250,000 life insurance policy). You’re young, relatively broke, but very healthy so this feels like enough for that moment. Let’s say at 28, you’ve become a parent so at 30 you buy a second term policy for 5x your salary, but for 20 years, so that your child will be taken care of should you pass away before they become an adult (and college graduate). Then maybe at 40 you have 3 children now, so you purchase another 20 year policy because you need more coverage, and also, you make a lot more money now than you did at 25. Continuing on with our analogy, let’s say now that you pass away suddenly at age 45 (very sad). Your family now gets the death benefit from 3 policies: your original 30-year term that you bought as a baby adult, the 20-year term you got as a new parent, and the 20-year term that you bought when you had three children and made way more money. If you died at age 51, the first 20-year policy would have expired but your firstborn would also be an adult, so a bit less in need of intensive financial support. If you died at age 61, all your policies would have expired, but your children would all be adults, and you’d hopefully have amassed other riches to pass on to them, like a hefty retirement account, a (mostly) paid off home, and other things that you will no longer need since you’ve left the mortal plane.
Universal or whole life insurance is (as the name implies) a life insurance policy that covers you for your whole life. These policies can sometimes have a cash value that you could draw money from while you are alive, as well as the death benefit payout.
Here’s my quick soapbox: It can be tempting to opt for a whole life policy because the term life policy feels like throwing your money away. However, these policies are expensive and it makes them unsuitable for most people. The premiums are so high that many people let the policy lapse when they face hard times, and then they have no life insurance and have paid much more money than they would have with a similar level of coverage in a term life insurance policy. Brokers (people that sell these kinds of policies) may try to convince you that it’s a good idea, because you can invest money and build wealth, but it would literally be cheaper in most cases to buy a term policy and put the difference in price in a brokerage account to invest yourself. If you want more information, talk to a financial advisor (who does not sell this kind of insurance) to see if it’s a good idea for you.
Let’s say you were interested in getting yourself some life insurance…where do you even find it?
There are companies who compile lists of policies, such as Ladder (through which you can purchase insurance) or Policy Genius (which lets you compare insurance quotes from multiple providers), and those can be a great place to start.
Most places that sell any kind of insurance also have some vehicle for you to purchase life insurance as well.
Your employer may offer some coverage which you can add onto by paying a few dollars (but you’d lose all of it if you left your job).
If you are a college graduate, or in any other kind of large organization, they may offer term life policies under group coverage as well.
You made it to the end! This was a lot of information, but also just an intro, so I hope it was enough to help you get started!
