Millennials were born between 1981 and 1996, meaning they are in their late 20s to early 40s. Most are getting married, starting families, buying homes and making significant career advancements. This is the perfect time to begin long-term financial planning.
However, with so many added responsibilities and layers when starting a family and career, thinking years into the future sometimes gets set aside in favor of the complexities of day-to-day life. Despite this challenge, now is a good time to protect your loved ones from potential financial distress. One way to do that is buying life insurance.
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Understanding Life Insurance Basics
If you’re a millennial and haven’t looked into life insurance coverage, it’s best to start with the basics first.
Life coverage is a contract between you and a life insurance company. In exchange for paying premiums on a policy, your beneficiaries will receive a death benefit payment to protect their financial future if you pass away while the policy is in force.
Policies are divided into two broad categories, and costs are directly related to the type of life insurance you choose.
Term Life Insurance
Term life insurance products let a policyholder buy coverage for a specific period, generally a term length between 10 and 30 years. If the insured person passes away during that period and the premiums are up to date, the insurance company will pay a predetermined amount to the beneficiaries named in the policy. When the policy period ends, the policy is no longer in force.
Term life insurance rates are the lowest-priced policies and provide straightforward coverage with a low barrier to entry. If you’re a millennial and have a lot of other obligations to juggle, term life insurance provides financial security on a budget.
Some term life policies let you add more coverage later or convert to a whole life policy that will provide coverage for your entire life.
Many companies offer term insurance policies. You can see our top term life insurance providers to help you narrow your choices when shopping for a policy.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance. These policies provide coverage for the policyholder’s entire life as long as premiums are kept up to date. The other big difference versus a term policy is that whole life policies have a cash value component. This means the policy accumulates value as you pay premiums, and you can access that cash value as a loan, pay for additional coverage or pay premiums instead of making payments from your personal accounts.
Whole life policies are more expensive than term policies because of the length of coverage that increases the insurers’ risk in later years and the cash value component that adds to the overhead and expenses.
Several types of whole life policies are available, including universal life that gives policyholders flexibility with premium payments and a death benefit.
Indexed universal life ties growth to the performance of one or more equity indexes the policyholder selects. Policy growth is capped, and in most cases, the insurer limits policy losses in down markets.
Variable universal life policies accrue growth that depends on the performance of investment options made available by the insurer and selected by the policyholder.
Many companies offer whole life insurance policies. You can see our top whole life insurance companies to help you narrow your choices when shopping for a policy.
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Determining Coverage Needs for Millennials
Young adults are often juggling student loans, mortgage payments and childcare costs. These life events can be considerable financial responsibilities over the short and long term. As you get older, you may add other financial obligations, such as helping your children pay for college, buying a vacation home or other similar encumbrances.
Paying for these big-ticket items takes discipline for the month-to-month financial costs, but it is also important to consider how these obligations will continue to be paid if you pass away. That’s where the benefits of life insurance apply.
When you work with a financial planner or an insurance agent, this should be part of your discussion. You may have a handle on some of your future financial obligations, but there may be things you aren’t aware of, haven’t thought of or need assistance with to determine exactly how much those costs will be.
Factor in these obligations and potential variables to determine how much coverage you should consider buying. You can also use widely accepted formulas and strategies to help you buy enough life insurance.
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Factors Affecting Life Insurance Affordability
Life insurance is competitively priced throughout the industry, and while each insurer has a unique methodology to arrive at policy costs, several factors are standard across the board. The premium you pay will typically depend on the following:
Age. Younger policyholders statistically live longer, meaning they will likely pay into their policies longer, too. That means less risk to insurers, which results in lower premium costs. In other words, millennials will pay less than baby boomers for the same coverage.
Health and medical history. Before you’re issued a policy, you may be required to take a medical exam. If you have a history of conditions such as cancer, diabetes, heart disease or other similar health issues, your risk is greater, which means you’ll pay more for coverage. Also, if you have a multi-generational history of severe illness or hereditary disease, that may result in higher premiums.
Occupation. If you’re in a high-risk career such as a firefighter, pilot, police officer or in some construction trades, you’ll probably pay more for coverage. If an insurer thinks your job is too dangerous, it may decline coverage altogether.
Gender. Life insurance premiums are lower for females because their life expectancy is longer than for males.
Lifestyle. If you’re an adventurous millennial who regularly engages in dangerous hobbies such as mountain climbing or skydiving, you may see that reflected in higher premiums. Heavy drinking or smoking could also impact your costs.
Policy type. Term life insurance is generally the most affordable, while universal life and whole life are priced much higher.
Coverage amount. The higher the coverage, the more you’ll pay in monthly premiums.
Credit standing. Some states let insurers factor in a credit-based insurance score when determining premiums to determine your risk profile.
Rate Classifications and Underwriting
Insurance companies typically use three risk classes to determine policyholders’ premiums. The criteria for each class are similar from company to company, but the specific requirements vary slightly. The classes include:
Super Preferred risk class. People in this category are rated as having excellent overall health and don’t engage in risky hobbies or have dangerous occupations. You can’t have a history of tobacco use in the past five years, drug or alcohol abuse in the past 10 years or a history of cancer or heart disease. Only a small percentage of applicants qualify for this risk class.
Preferred risk class. Those who qualify for this risk class have a similar profile as someone in the Super Preferred class. However, they might be taking medication to treat a condition such as high blood pressure, be slightly overweight or have a family history indicative of risk. People who have diabetes or some mental health conditions such as anxiety or depression that are being well managed can still qualify for this class.
Standard risk class. Most people fall into this risk class. People in the standard class usually have a higher body mass index (BMI), take multiple medications or have potential health issues. Some risky occupations and lifestyle choices are acceptable, and smoking is treated more leniently. Typically, you must be tobacco-free for a year.
Substandard table rating. Insurers use a table rating system of letters or numbers to classify policyholders who are considered substandard. It is used for those with significant health conditions or a short track record of managing a health condition. Table ratings may be warranted when someone has past alcohol abuse or treatment, severe asthma, bipolar disorder, epilepsy, multiple sclerosis and Type 1 diabetes.
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Choosing the Right Life Insurance Policy
Based on your anticipated protection needs and what you can afford, you’ll have a range of policy types and amounts that will fit your current and future needs.
One way to help you zero in on the best possible policy for your needs is to add riders to a policy you’re considering. Riders are additional types of coverage that give you exactly what you need to create a customized policy that protects you against various life contingencies.
Riders and costs vary by policy and insurer. Some riders are free, but others may be added to the premium cost.
Common riders include:
Child term life insurance rider. This allows you to add small amounts of coverage for all your dependent children. Term coverage is often convertible to a permanent life insurance policy when the child reaches a certain age.
Accelerated Terminal Illness rider. This rider is often included at no charge and allows those diagnosed with a terminal illness to collect a portion of the death benefit while still alive.
Critical Illness rider. This is similar to a terminal illness rider, except the policyholder does not need to be diagnosed as terminal to collect a portion of their death benefit. It covers illnesses and diseases such as cancers, neurologic conditions, diabetes and similar maladies.
Accidental Death and Dismemberment rider. If you die due to an accident, your beneficiaries can be awarded an additional policy death benefit. Some riders also provide coverage for dismemberment, such as losing a limb or paralysis.
Waiver of Premium rider. This pays premiums so a policy can remain in force when you become disabled and can’t work.
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Navigating the Application and Underwriting Process
When you apply, you’ll work with an insurance agent, broker, or insurer directly to buy a policy. It’s a good idea to also consult a financial planner if you have one. You’ll complete an application and undergo an underwriting process. This involves asking detailed questions about your current health, health history, lifestyle and other important questions to help an insurer place you in the right risk category. In most cases, you’ll also undergo a medical exam to confirm your answers and reveal any additional health concerns an insurance provider might have.
While several factors influence your risk profile and how much you’ll pay in premiums, a few things will not affect your costs. Those include:
Marital status
Ethnicity, race and sexual orientation
Current credit score (although an insurer will typically review your credit history for seven years to see if you have any bankruptcies, which can indicate a higher risk of mortality)
Number of life insurance policies you currently own. However, you will need to justify purchasing large amounts of coverage across multiple policies.
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Is Life Insurance Worth It For Millennials?
Integrating life insurance with other financial goals may be something that you want to consider as part of your financial planning as a millennial. Although you’re younger, it is never too early to protect your family with a well-thought-out estate plan.
Life insurance can protect assets you’re accumulating and provide a financial cushion that replaces lost income if you pass away.
Instead of viewing life insurance as a competing cost against a mortgage, student loan debt and raising children, it’s better to view a life insurance policy as what it’s worth based on the peace of mind and financial protection it gives your family if you’re gone.
Author: Graham Ray
Source: © 2024 MarketWatch, Inc.
Retrieved from: marketwatch.com
FINRA Compliance Reviewed by Red Oak: 3754884
Indexed Universal Life Insurance is an insurance contract that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed universal life insurance for its features, costs, risks, and how the variables are calculated.
Please consider the investment objectives, risks, charges, expenses, and your need for death-benefit coverage carefully before investing. The prospectus, which contains this and other information about the variable life policy and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable life policy are not guaranteed. Variable life sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the policy is surrendered. Any guarantees offered are backed by the financial strength of the insurance company.