What’s the right life insurance policy for a young professional?
Congratulations! Your hard work in college has paid off and you are starting your professional career, or hitting major life milestones such as getting married or having a child. You may be wondering if life insurance is right for you, or which type should you look into depending on your current life situation and financial goals.
Fortunately, you are thinking the right way. The purpose of life insurance is to provide financial security at your death for the people in your life who depend on you, such as your spouse, children or family members. We call this a “safety net” issue. The first step is to decide how much insurance is warranted, then you can decide on the type of coverage that fits best.
The goal is to ease off some financial stress by replacing your wages with a death benefit. Start by adding up any debts and financial obligations, such as funeral expenses, student and auto loans, or a child’s future tuition. Include an amount for several years’ worth of on-going household expenses if you are the sole source of your family’s income. Also, consider the importance of providing ample funds for your spouse or beneficiary so they can continue to plan and contribute for their retirement. The total of all these is the death benefit you need. Keep in mind that life insurance is normally tax-free to a recipient.With the “how much” settled, now you can decide on the “how” part. The primary hurdle is the cost (or premium) you will pay. When applying for coverage, your age and health determine the cost. The younger you are, the lower your premiums will be. The cost increases about 10% annually as you age. Life insurance companies will assess your health to determine any risk factors. Thus, a healthy lifestyle reduces premiums because there is a lower mortality risk. Insurers rate these factors differently, which is why you want to get quotes from multiple companies. You just need to choose which type you want: term or permanent.
Before we get into the two types of life insurance policies, it is important for young professionals to know that most employers offer group term life insurance policies as part of their benefits package. These policies are affordable, easily paid through payroll, and often do not require medical assessments to get the coverage. Some employers even subsidize the cost. It is important to note that group term life insurance coverage typically ends when you leave your job. Although it may be possible to convert the policy into your individual name, the premium could increase substantially.An individual term life insurance policy lasts for a certain period of time, whether annual (like your auto coverage), or a fixed period of 10, 20 or more years. Annual term is the cheapest option, but it goes up each year. You can purchase a level-premium policy for a fixed time, such as 20 years, that has the same (though higher) premium every year. Once the time ends, the coverage does, too. At a certain age (usually 75), term coverage is no longer available. These types of policies are favorable for young families with tight budgets. Since the risk of dying is less, the plan is that you will live, and put your earnings towards paying off debts and building your retirement funds. The insurance is the safety net in case that does not happen. Note that term insurance requires an annual premium payment. If you miss it, the policy will be cancelled after a grace period (usually 30 days), so make sure you set up an auto-pay feature.
No matter the type of policy, the purpose of life insurance is to fill the financial gap left by your death. Purchasing a life insurance policy gives you the peace of mind to focus on other important things in life knowing that income for a spouse, child, or loved one will be secured in the event of your untimely demise.
Permanent life insurance is term insurance wrapped inside a savings account held by the insurance company. The premium you pay each year pays for the insurance, policy expenses and the rest is invested. Ideally, the savings grow and help support the cost of the policy when you are much older. Adding this savings element to the policy makes it more complicated, adds expense for the policy structure, and requires you to pay far more in premiums. The savings (which can be invested by you or the insurance company) grow tax-free if you do not use them. There are many other aspects to these policies, so get expert advice if you go with this route. Permanent life policies may be a good fit for individuals who are augmenting their net worth, have some money to spend with the goal of preserving their accumulated wealth, and want some flexibility in putting together an estate plan.
All information in this document is from sources believed to be reliable and is for informational and educational purposes only. It is not intended to be, and should not be construed as, advice, legal or otherwise. Daintree Advisors LLC (“Daintree”) may not have verified the information for accuracy or completeness, and Daintree assumes no liability for damages resulting from or arising out of the use of such information. You are solely responsible for evaluating the merits and risks of the use of this information. To ensure compliance with IRS requirements, we inform you that any federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this document.