When you’re just getting out of college or starting out life as a young adult, there are a lot of mysterious financial considerations.
One of them is certainly life insurance. You know you need it, but how much do you need? And equally important – given all of your other expenses – how can you save money on life insurance?
Here are three strategies I recommend…
Buy Now (As in Today!)
I actually mean that in the most literal way possible! A life insurance policy will never be less expensive than what it will be right now. Delaying until “later” can turn out to be several years, and that will make the premium even more expensive.
For example, the annual premium on a term life insurance policy with a face amount of $250,000 for a healthy 25-year-old non-smoking, male would be as low as $212, but at age 45 it goes all the way to $518.
That’s hardly the worst of it either. There are a couple of other situations that we never like to think about, but that you need to when considering life insurance:
- You could come down with a serious illness – a cancer episode before getting a policy could turn that $200 premium into $2,000. Worse, you could be deemed uninsurable.
- You could die without coverage – not only would your loved ones suffer from the shock of your loss, but also from the lack of funds that a life insurance policy will provide.
I don’t mean to scare you, but that stuff happens in the real world. And they’re the very circumstances life insurance is meant to protect your loved ones from.
When it comes to life insurance, there’s no better day to act than today!
It’s Cliché, But Buy Term and Invest the Difference
If you’ve ever heard anything about life insurance, you’ve probably heard that said. And it’s said and repeated for a very good reason: term life insurance is a lot less expensive than whole life insurance.
It’s not a minor difference either. The premium on a whole life policy can be anywhere from 5 to 10 times higher than it will be for a term policy with the same death benefit.
If you’re a young person just starting out in life, or if you have a young family with small children, it can be difficult to afford the premium on a whole life insurance policy. While a $200 annual premium for a term policy will likely be well within your budget, a $2,000 premium for a whole life policy could be a budget buster.
Insurance agents will often try to sell you on the investment function of whole life but don’t buy it. You can almost always do better by buying an inexpensive term policy and then investing the difference in a mutual fund. This is especially true if the fund is a no-load index fund that tracks a popular index, like the S&P 500.
Also, don’t worry about the fact that term life insurance is only temporary coverage. You can actually buy a term life policy for a term of up to 30 years. That will likely cover the time in your life when your need for life insurance will be the greatest since that’s the time when you will be raising your children and paying the mortgage on your house. After that, you won’t need as much coverage.
Never Buy More Life Insurance than You Actually Need
Rather than saying “I need $2 million in life insurance,” or some other arbitrary figure, instead calculate exactly how much coverage you will need.
Paying for more life insurance than you need is a complete waste of money.
Let’s say that you’re 30 years old, married, and have a five-year-old child. You also own your home, complete with a $150,000 mortgage.
You might calculate your insurance amount by determining specific needs based on your financial situation. There are three financial needs that are obvious:
- Paying off your mortgage. You’ll need $150,000.
- Financial support for your family. If you decide that your family will need $25,000 per year for the next 13 years (until your child is 18) you’ll need $325,000.
- Your child’s college education. You might allocate $100,000 to help cover this expense.
In order to cover all three contingencies, you’ll need coverage equal to $575,000. That’s a lot of coverage, but it’s a lot less than $2 million.
This kind of calculation is an excellent reason why it’s best to get your life insurance through an independent life insurance agent. They can help you come up with the right amount of insurance coverage, for the lowest premium possible, with the best life insurance company. As simple as it seems, life insurance is one of those areas where the do-it-yourself route can actually cost you more money.