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A Millennial's Guide to Life Insurance

August 19, 2016

 

  

 

Life insurance is depressing. You’re gambling with an insurance company about whether or not you’ll die before a certain age. If you lose your bet, you’re out tens of thousands of dollars. If you “win,” you rake in a handsome 6- or 7-figure payday. Oh, and you’re dead. Pretty fun bet to place in your 20s and 30s, eh?

So while I’d rather spend my day waiting in line at the DMV than jump into this morbid topic, we’ve just got to rip this bandaid off. So if you bookmark only one thing today, let it be this post. Better yet, if this is something you’ve been meaning to do, don’t bookmark this post — just do it. Or leave it open as a tab in your browser for a few weeks, making you feel guiltier and guiltier every time you pass over it until you finally do it.

We’re going to walk through the entire process of buying a life insurance policy. Hold on to your party hats.

Why Do I Need Life Insurance?

Because you do. When you buy life insurance, you’re setting up a contingency plan that will support your loved ones financially while they move forward without you and your income (both current and future). Basically, life insurance is an emergency fund on steroids. But unlike an emergency fund, you don’t have to save all that money on your own. For a fraction of the policy’s pay out, you can buy peace of mind knowing that your family is taken care of. All in all, life insurance is a great deal and an invaluable investment for you and your family.

Tl;dr (too long; didn’t read) answer: you need life insurance because you love your family.

When Do I Need to Get Life Insurance?

There’s no “time to get life insurance” age. It all boils down to a simple question: if *poof* you weren’t here tomorrow, would it affect anyone financially? For Joanna and I, we answered “no” for the first five years of our marriage. We were both college graduates with professions, limited debt to our name, and no dependencies. But as soon as our little human, Sally, came along, we moved solidly to the “yes” column. Parenthood is probably the most common trigger, but for others it might be a home purchase, a medical condition/disability of a significant other, or other event/factor resulting in an increased cost of living.

Another consideration is that generally, the younger you are, the healthier you are. That directly translates to a cheaper premium. So take advantage of the younger, healthier you and lock in a great, affordable premium for the next 20- or 30- years.

Tl;dr answer: buy life insurance as soon as others depend on your income.

What Type of Policy Should I Get?

First things first, there are two equally boring policy options: term and whole (aka permanent).Term life is insurance at its purest. If X bad thing happens, you will give me $X. Whole life insurance is a little murkier. Whole policies pay out at any age of death, as long as you continue to pay premiums until your death. Whole life policies also include “cash value,” sometimes pitched as savings or investment accounts by insurance salesmen.

The merits and drawbacks of both plans have already been debated to death, but most sensible financial experts agree so we’ll just cut to the chase. Go with a term life policy. Whole life is expensive, inefficient, and it’s a pretty lousy investment. It also pays out a much higher commission for insurance salesmen, so if you’ve got an agent, don’t be surprised to be sold hard on whole life. There are a few scenarios where whole makes sense, but if you’re young, healthy, and don’t have a ton of money to your name, term is your policy.

The important thing to remember is that this is insurance, not an investment.

Tl;dr answer: go with term.

 

 

How Much Life Insurance Do I Need?

There’s a better way to ask this question: how much money would my family need to reestablish life without me? Depending on who you listen to, you’ll probably hear a bunch of formulas that range from as few as five years to as many as twenty years of your current salary. So if you currently make $100k, that’s a range of $500k to $2 million. That’s not particularly helpful.

Instead of just using a year multiplier, really think about your current financial situation and what it would take to cover those expenses. Here’s one method to get to your coverage amount.

  • Add up your mortgage and any other outstanding debts. The last thing you want to do is leave your family with debt payments. Let’s call these debts.

  • Look at your current budget and figure out your annual budgeted expenses. Let’s call these living expenses.

  • Decide the amount of time it might be reasonable to expect that the surviving spouse could reestablish a livable salary. It might be five, ten, or twenty years depending on your specific circumstances. Let’s call this duration.

  • Multiply living expenses by duration to get a solid baseline of minimum coverage. Then add your debts.

  • Consider and add any additional costs that you might incur without your spouse like child care, employment training costs, tuition to go back to school, funeral expenses, children’s college expenses, daughter’s weddings (ahhh great… now you got me all teary eyed — can we just stop writing about this stuff yet?), etc. etc. Let’s call these additional expenses and add those to your total.

  • Take your total and add an extra 5-10% of extra padding. When in doubt with life insurance, round up.

  • And here’s your formula: debts + (living expenses x duration) + additional expenses =estimated total x 1.05 OR 1.10 = total coverage needed. YEAH MATH!

For an alternative, nerdier approach to spreading your coverage amount over time and reducing it as you grow older (when you should theoretically have less coverage needs), you can read up on laddering policies here.

Tl;dr answer: figure out how much money your family would need without you and for how long, plus a 5%-10% cushion.

How Do I Buy Life Insurance?

Getting through the previous four questions took Joanna and me… two years. It’s not like we don’t know how to read or use AskJeeves or anything. But every time I’d put “GET LIFE INSURANCE!!1!” on my weekly to do list, I’d do a little more research, get overwhelmed, and put it off another week or 100. All of this is to say, if you can just smack your head a few times, pump yourself up, and then plow through the sections above, you’re way more than halfway there. Actually buying your policy is gravy — not very appetizing, kinda hard to swallow, but still gravy-ish gravy.

So you now know why you need life insurance, when to get it, what type of policy to get, and how much. It’s time to shop! (By the way, if your significant loves shopping, saying “Let’s shop for a [life insurance policy] today!” is a trick way to get them pumped about any mind numbingly boring financial product purchase.) I’ll walk you through what we did, as well as providing some alternate routes.

Step 1: Get some quotes online

We started our policy shopping where we start most of our shopping: the interwebs. It’s instinctual with our generation and seems much easier than the alternative — talking to people. After an hour of searching and browsing sites, I was shocked at how antiquated life insurance shopping is online. I felt like I was dialing up on my modem and connecting to AOL on a lot of sites. On others, I worried that entering my phone number for a quote was going to be sold to the bad guys from Taken. All in all, we were super underwhelmed.

And then we found AccuQuote.

KAYAK.com is to travel search as AccuQuote is to life insurance search. Alright, so the site might not be quite as pretty, but it’s hard when your competition is photos of Hawaiian beaches. AccuQuote stood out for two reasons. One, it almost exclusively offers term policies. Two, once you fill out your information, you don’t have to wait for a phone call or a sale-sy email. They actually give you quotes right there on the site from a handful of reputable providers. I promise this entire post isn’t a giant sales pitch for them, we just found them especially helpful among a sea of lackluster options.

Step 2: Make sure the coverage/premium fits your budget

After filling out the form and reviewing the quotes, you’ll want to make sure that the monthly premium can fit your budget. If it will break your budget, look to cut costs in other categories or earn a little extra money. Otherwise, you might need to settle for a smaller coverage amount that you can afford for the time being. But remember, you can always (assuming you remain in a passable state of health) add more policies in the future.

Step 3: Select a company and quote

Now it’s time to select a quote. Here’s what a sample quote looks like on AccuQuote:

 

Take note of the annual premium (what you’ll pay), the coverage type (which denotes the length of the policy), and the various ratings (the financial soundness of a company). You’re looking for the lowest premium by the highest ranked company with a policy that accepts your health/medical/risk profile. For the most part, the premiums won’t fluctuate too wildly from quote to quote. Maybe more important than saving a couple bucks a year is to ensure you’re insured by a highly-rated, financially healthy company. For us, Prudential was an option that cost a few dollars more a year than other policies, but it had a higher rating and we’d had previous pleasant experiences working with them with a 401k plan.

Step 4: Apply for a policy

Once you feel good about a quote, it’s time to apply. With AccuQuote, you can always ask and/or change policies later in the application process, so don’t be too worried about making the perfect selection just yet.

The application process is fairly personal and tedious. Lots of questions about your current health, your medical history, your family’s medical history, what adventure sports you participate in,the worst thing you did when you were 12 (kidding), etc. Remember, they’re about to make a bet on you not dying, so they need all the information they can get before they put money on their horse — you. During the application, answer truthfully. If you lie, many of those mistruths will be unearthed in your medical exam, and if they’re not and the insurance provider finds out about them, buh bye policy.

After you fill out the application, you’ll likely get a phone call within 24-hours from an AccuQuote representative. Remember that at no point are you obligated to go forward with a policy. You’re still in the dating phase. My phone chat was actually really awesome. The woman was very thorough, answered all my questions, helped me find an even more inexpensive option, and never once tried to upsell or force any additional products on me. We even spent five minutes just chatting about our cats. I was surprised by how natural that topic was for me to talk about length. Anyway, she walked me through a few more application questions specific to Prudential’s policy, helped me schedule an at-home medical exam, and outlined next steps.

Alternative options

We’ve never had an insurance agent. Part independent spirit, part stubbornness, part not wanting to talk to people on the phone, we’ve just never really considered having one. But if you have an agent you trust, ask them to provide you with some quotes. You should still useAccuQuote to get your own quotes and compare them against your agent’s. If your agent quotes you at significantly higher rates, ask why.

If you feel you need more hand holding than what’s outlined in this post, Term4Sale is another popular option for finding a local independent agent. You can get quotes with direct contact information for that company’s local agent and have them walk you through the process from there.

Tl;dr answer: go to AccuQuote.com, get some quotes, make sure it fits your budget, choose a policy, and apply

 

 

Finalizing Your Life Insurance Policy

Almost there! See this hasn’t been so bad. There are only a few final steps and considerations before you’re walking out the door with a brand… new… life insurance policy. That would be the worst Price is Right prize ever.

Medical exam

Somehow I missed the memo that getting life insurance (or at least a good policy) requires a complimentary medical exam. I mean, it totally makes sense, I just never imagined a guy coming to my house at 8am with a scale, blood drawing kit, and containers to hold my urine. AccuQuote did a great job prepping me on things to do and not do leading up to the exam like refraining from caffeine and high-sugar or fatty foods, avoiding overly strenuous exercise (weird, right?), and when to start fasting. That week leading up to the medical exam might have been my healthiest ever. Oh, what saving money will compel us to do.

The actual exam was no sweat (assuming you’re cool with getting your blood drawn). It took about three or four weeks before I got the approval back from AccuQuote. I was actually super pumped about getting approved because I knew that all of my lab results said good enough things for an actuary to want to bet on me living for a long-ish time. That’s kinda cool, right? Just agree with me. Thanks. At least in our situation, Prudential also sent me my medical results, which I plan on taking to a doctor sometime in the near future to count as my yearly physical.

Beneficiaries

Should the D word happen, you need to designate where that money will go. Usually your primary beneficiary will be your surviving spouse. You can then select a contingent or secondary beneficiary like a legal guardian of your children. It’s generally not a great idea to assign any children under 18, as they won’t have control of the money until they reach 18 years old. You can make things simple and assign your estate as beneficiary (which is what we hope to do soon). But no matter what you do, review your beneficiaries every few years and change them whenever appropriate.

Premium payment term lengths

Most companies will offer monthly, quarterly, or annually payment options. If you have the money to pay the annual installment, do it. You’ll save processing fees that are assessed every time a payment is issued. Those add up over the course of a year (times 30).

Keep your S.O. in the know

This whole post is a terrible date night topic, but it’s definitely a discussion you should have with your significant other. You might have different opinions on coverage needs or what you can afford right now, but most importantly, you’ll both want to know what it all means should it all happen. Once you get your policy paperwork, make sure your spouse knows where it’s filed.

Pray you never use it

This is definitely one insurance you never want to see cash out. While it might cost $20k+ after 30 years of paying premiums, you should feel relieved when your plan expires. If you’re budgeting, living within your means, and making smart financial decisions, you won’t need a life insurance policy after your 50’s and 60’s. You’ll likely be empty nesters with reduced living costs, a paid off or nearly paid off mortgage, and on the cusp of enjoying the fruit of your compounding interest labors in retirement. Be grateful that you’re alive and that your family has you instead of a bunch of green paper.

Any other nuggets of wisdom to add? Any questions or fuzzy areas? Chime in with a comment.

*Note: if you choose to purchase a policy through AccuQuote from a link in this article, we earn a small commission. We actually had such a positive experience months ago with AccuQuote in our own search for life insurance that we sought out this affiliation. We love those dudes/dudettes 1000%.

 

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