For those still in the early stages of adulthood, life insurance might seem like a far-off necessity, in league with hip replacements and Social Security checks. Nobody wants to think about death in their 20s and 30s. Additionally, the financial priorities of young people often don't include life insurance because they don't understand its purpose. Why pay now for something you probably won't need or benefit from for so many years to come? Many factors contribute to this mindset and the lack of an appetite for life insurance among millennials in general. However, two misconceptions play a large role.
Misconception no. 1: life insurance is an investment
Many young people misinterpret the purpose of life insurance because they view it as an investment, or something meant to eventually generate a profit. This notion is at least partially due to the confusing marketing messages that companies use to sell whole or cash value life insurance policies, which are significantly different from the term life insurance policies suitable for most young people.
"The marketplace for insurance products has become overwhelmingly complex, with life insurance now being marketed as a blanket tool for risk management, retirement and education," said Adam Harding, a certified financial planner from Phoenix. "Unfortunately, these complex products come with compelling marketing but complicated structures and robust fees."
Whole life policies, which often do contain savings, investment and life insurance benefits, rarely make financial sense for young people. They're expensive and inefficient vehicles for reaching the financial goals young people have set. However, they're often the only type of life insurance people hear about. And if a young adult has to choose between a confusing or expensive investment and, say, traveling, most will choose the latter.
In reality, most young people shouldn't view life insurance as an investment at all. Instead, it should be viewed as a tool to offset risk. "Life insurance follows the principles of indemnification," said Harding. "This simply means that the aim is to offset the risk of losing an individual [and their earning power], not to profit from the loss."
If you balk at the idea of paying for life insurance for most of your adult life, only to let it expire once you reach retirement age, you're still thinking of life insurance as an investment. Sure, by purchasing a whole life policy, you could obtain coverage for your entire life, guaranteeing that your loved ones will eventually receive a payout. However, your goal shouldn't be to eventually receive a payout, just as paying down your financial obligations shouldn't depend on your death. Your goal should be to protect your family if you pass away before these financial goals are met, and you'll be better positioned to achieve this with a term life insurance policy.
When you start to understand the product as something that could provide for your loved ones in your absence, rather than something for you to make a profit from, you start to better understand its value.
Misconception no. 2: life insurance is expensive
The 2017 Insurance Barometer Study conducted by LIMRA and the nonprofit Life Happens shows that millennials, in particular, overestimate how much life insurance costs. When asked how much a 20-year, $250,000 term life insurance policy would cost for a healthy 30-year-old, 44% of millennials estimated the cost would be more than $1,000 per year. The actual cost could be as low as $160, according to the study — less than one-sixth of the estimated cost.
Our own analysis shows the average cost of such a policy would be closer to $335 per year. However, that's still only one-third of the cost estimated by many millennials.
Ironically, it's these types of financial milestones that a life insurance policy is meant to preserve, and by delaying the purchase of life insurance until later in life, many individuals miss out on the chance to lock in reduced rates for the duration of their policies.
Again, young people should consider purchasing affordable term life insurance policies as a form of protection for their loved ones if one of them should die during their wage-earning years. Term life insurance only covers policyholders for a fixed number of years, but it costs significantly less than a whole life policy. During those years when they're insured, policyholders should work to pay down debts and build up savings, so their families will be financially self-sufficient after the policy expires.
How to determine how much coverage you need
To determine how much coverage you should purchase, add up all of your financial obligations, such as student loan repayments, credit card debts and your mortgage balance. Next, add to that amount your estimated funeral and burial costs, typically about $10,000. Finally, if you're the sole breadwinner for your family, or if your income provides a substantial amount of your family's earnings, consider adding three to five times your annual income to further support your family in your absence.
Use this number as the base amount of insurance you should consider purchasing. Then compare quotes from some of the best life insurance companies to find a policy that works best for you.
"The key word here is need," said Harding. Determine what your family would need in your absence, then once you're insured, work toward meeting those needs by the time your policy expires.