Insurance is a blessing when you need it, but for young people it's also another bill to add to a growing list as they descend onto adulthood. Millennials -- that much-discussed subset of the population between the ages of 18 and 32 -- have an array of financial priorities, so it should come as no surprise that more than half of them do not have life insurance, according to a new survey by TD. The survey cites that one-third have thought about it, especially when it comes to caring for dependents.
Unlike a mortgage or a student loan, life insurance does not have an immediate tangible benefit. Unlike your month-to-month bills, it doesn't keep you warm, entertained or connected. As a result, it has fallen quite low on the list of financial priorities.
"Insurance is a vital piece of your overall financial picture, but it's a challenge bringing it to front of mind when you're doing all of your financial planning," says Mark Hardy, senior manager of direct life & health at TD Insurance. "You've got so many priorities at this stage of life."
The survey found that paying down debt and saving for a house were much higher on the financial "to do" list, with life insurance coming in as the lowest priority. Working it into your monthly budget, however, can often be a worthwhile investment that can help you protect your loved ones down the road.
Step 1: Determine whether you need it
When it comes to the question of whether or not millennials should purchase life insurance, the answer really depends on your life situation. The purpose of life insurance is to help provide financial support to your loved ones should something happen to you. If you have dependents or other loved ones who rely on you financially or would have to pay down your debts if you pass, then the clear answer is yes to life insurance.
Step 2: Do your research and determine the type that works best for you
The two basic forms of life insurance are term and whole life. Working millennials are often covered through a term policy at work, and should delve into their policy to find out how much coverage they have. A term policy, however, only covers the insured party for a specific number of years. Once this term ends -- typically the duration of employment for an employee plan -- the individual must start again under a new policy and likely higher premiums.
A permanent or whole life policy tends to cost more but comes with lifetime coverage and cash value that can be redeemed. The cash value component is invested on a tax-deferred basis. Some would argue that purchasing term insurance and investing the difference within a registered plan is the better option to utilize the monthly cost of whole life insurance. When considering this type of policy, take the time to research the investment strategy used by the insurer and fees paid to determine if it's the right fit for you based on your risk tolerance and (likely long) investment time horizon.
Step 3: Calculate how much you need
The amount of coverage you need depends on a variety of factors including number of dependents, annual living expenses, amount of debt and annual income. In short, you must determine how much money your dependents would need upon your death to cover immediate bills and other expenses. There is a plethora of online resources to help millennials get started in determining the amount of coverage they need, including TD's Right Fit Coverage Assessment Tool.
One common misconception is that insurance payouts are for funeral arrangements, but the truth is it goes further than that. Everything from mortgage payments to student loan payments should be considered to ensure that your loved ones are able to cover your near-term obligations.
Step 4: Work it into your budget
When it comes down to it, if budgeted correctly, monthly insurance premiums should be easily worked into a working millennial's budget. In fact, Hardy estimates that people typically believe insurance costs three times the amount it actually costs. For illustration purposes, a 20-year term policy for a healthy 30-year old male costs as little as $40 per month for $500,000 of coverage. Sitting down with an advisor is one way to work life insurance into your monthly budget without compromising your lifestyle and other financial priorities.
"You have to find the wiggle room," says Nathan Osterhout, a financial advisor with Edward Jones. "When you're young, insurance is relatively cheap. You can get quite a bit of coverage for the cost of a cup of coffee a day."
Step 5: Review it regularly
It isn't enough to simply purchase life insurance. Millennials are at a stage in life where things are constantly changing, and insurance needs will shift in tandem with important life milestones. If you don't review your coverage regularly, you're at risk of not having the right coverage if the worst happens. Similar to an annual health check-up, Edward Jones recommends an annual insurance check-up with a financial professional.
"Most people just buy it and forget about it until there's a catalyst in their lives such as more kids, more debt or a higher paying job," adds Osterhout. "If you or your advising team isn't paying attention, it often gets pushed to the side."
Purchasing life insurance might not provide the rush of excitement that a new car or home might provide, but it can be an important part of an overall financial strategy -- particularly if you have dependents. Millennials have the opportunity to lock down lower premiums and protect themselves over the long term, and sitting down with a financial professional to discuss the options is a good place to start.
