Benefits of Life Insurance When You’re Young

Life insurance– like most financial topics– can be complicated, frustrating, confusing, and easier to just ignore than attempt to understand. As real adults, though, we are aiming to fight through that confusion and frustration and gain a true understanding of these complicated topics. Today I spoke with Paige Lehmann, a licensed life insurance professional out of Iowa, about what life insurance is and why it’s beneficial for young people… even though we are *hopefully* decades away from the end of our lives.

H: Thanks so much for joining us today! To start, can you explain what life insurance is?

P: Life insurance is a tool to protect your family, assets, and legacy in the case that you die too soon. There are many variations that accomplish different things, but in the end it’s to ensure that if you were to die, you leave your family with enough assets that they don’t have to worry while grieving. 

The most basic uses for life insurance are survivor protection, mortgage payoff, estate creation and liquidity, and cash accumulation.

• Survivor protection (spouse, child, or loved one who relies on the deceased’s income): A life insurance death benefit can replace the deceased’s income to relieve financial distress. This is big in one-income households where one parent stays home full-time and relies on the other parent’s income. It means the surviving family member doesn’t have to worry about money amidst everything else.

• Mortgage payoff: For those who may not need to replace the entire income, there are decreasing-term policies, so your payout reduces as you gradually pay off your mortgage. Mortgage payments are one of the most stressful, and largest payments, for the living to worry about.

• Estate creation & liquidity: An estate includes all the assets someone leaves behind. Liquidity is how easily an asset can be turned to cash without loss of value (checking/saving accounts, life insurance proceeds, gold, real estate, etc.). I’m not going to get into this today because it is pretty complicated and should be discussed with professionals who know your specific situation. 

H: What is the difference between term and whole?

P: Term life insurance is the simplest type - these policies only offer a death benefit and remain in force - or active - for a specified period of time. If the insured dies while it’s not in force, there will be no death benefit.

Term insurance has lower premiums (aka monthly payment) than other types of life insurance policies, but has no other coverage or benefits. It’s like renting a policy rather than owning. Additionally, you may have a low monthly premium now, but if you outlive your policy and want to add more, your premium will become significantly more expensive.

Whole life insurance is a permanent insurance policy that is guaranteed to remain in force for the insured’s entire lifetime as long as the premiums are paid.

One of the biggest differences is that a whole-life policy can act like an additional retirement account. It has a cash value that accumulates tax-deferred, meaning taxes aren’t taken out until a future point in time. The money can grow at a fixed or variable interest rate over time. If you outlive your family members and no longer have a need for the death benefit, you can pull the money out (both what you contributed AND what the money earned) and use it yourself. If term insurance is like renting, permanent life insurance is like owning. 

The biggest disadvantage of whole life insurance is that it’s a lot more expensive than term. However, it covers you forever… not just 5, 10, 20, and 30 years (and up to 100 years old).

H: This is great info! I have 30-year term for 1 million. I still have the choice to add some permanent over the next couple of years, but right now this is what I can afford. I want to protect my family but I also want to be able to keep living my life while I’m here. Oof! This is hard!

H: Can you tell us why someone in their 20s should get life insurance?

P: First and most importantly, family protection. A death benefit can offer stability and peace during a time of grieving. Life isn’t promised. You could be perfectly healthy in your 20s, but anything could happen. We all know that. Imagine leaving your family in financial distress if you were to die unexpectedly. You can protect them by getting life insurance today.

It’s also a really good strategy for tax and investment purposes… specifically if you have a permanent policy. The death benefit is paid out to surviving family members tax-free, and, as I said earlier, it’s a great addition to your retirement account. This is definitely something you should talk about with an insurance agent or financial advisor, as they would be able to better advise you on best steps for you.

H: Where would someone go to find out about getting their own insurance?

P: For term insurance someone can check out where they already have P&C (property & casualty: home, auto, etc.) and see if they offer term insurance or ask their P&C agent for a recommendation.

For permanent policies, ask family and friends for an advisor referral. Odds are someone in their network has a trusted advisor. Referrals are the best! 

H: My company has a $25,000 life insurance policy that is free to us. Why should I get additional life insurance?

P: Work policies are a great addition to another term or permanent policy, but the problem with work policies is that they aren’t transferable, so you lose it if you move companies. You want one that sticks with you throughout big life moves. Also, if you stay at the same job from 22-42 and keep their life insurance the entire time with no additional insurance, and then quit and decide to buy your own, your premium will be significantly more expensive at that point than if you’d gotten it at age 22.

H: This has all been so helpful. Do you have any other advice that we haven’t covered?

P: One strategy that’s interesting is that many young people will have a term policy with a high death benefit, let’s say 1 million, like you, and then a smaller permanent life policy that is just for accumulation. So then you don’t have as big of monthly premiums for a large death benefit, but are able to save tax-deferred funds and have that additional retirement vehicle. That’s what I plan to do for myself and my husband. 

H: Thanks for helping us out today, Paige!

I hope this has been helpful. As a reminder, this is a pretty basic summary of what life insurance is. To get more specifics on your needs, talk with a financial advisor, insurance agent, or trusted friend. Always ask a lot of questions to get a good understanding of this. It can be really complicated, but it’s definitely worth understanding the benefits!