Author: Domonique Rodgers

While everyone understands that death is inevitable, it isn’t something healthy people in their 20s tend to think about. As a result, Domonique Rodgers of NC State explains that many young adults do not currently have life insurance.

However, untimely deaths do happen, and those who suffer such unfortunate circumstances without life insurance won’t leave their loved ones with any financial security.

While many young people tend to mistake life insurance for being a luxury they can’t afford, it’s really as essential as general health insurance. Whether it’s a freak accident or a sudden medical issue, people can pass away unexpectedly, so even young adults should ensure they are fully covered to give their families some breathing room after death.

Life Insurance Provides Relief

Life insurance aims to financially protect families and dependents when a household earner dies — unexpectedly or otherwise. It gives those left behind the money to cover funeral costs, burials, cremations, and living expenses, giving them much-needed time to grieve.

While there are many types of life insurance, term policies tend to be the simplest and cheapest. When the policyholder dies, the beneficiary (i.e., a spouse, child, partner, parent, or close friend) receives a lump-sum payout.

Typically, the money is tax-free and isn’t attached to investments or savings. It is strictly to help people take care of final arrangements and cover certain costs like mortgages, utility bills, and more for a pre-determined period.

Contrary to Popular Belief, Life Insurance is for Young People

Death does not discriminate. So, financial planners encourage everyone with dependents to get a policy, even those in their early 20s.

Life insurance coverage is especially important when one spouse is the main breadwinner. It allows the surviving household members to take care of funeral expenses, which tend to cost between $7,000 and $9,000, while easing their monetary environment.

However, life insurance isn’t just necessary for young professionals. Stay-at-home spouses should also take out life insurance, as they perform a lot of unpaid tasks like cooking, childcare, cleaning, arranging appointments, and much more.

Grieving partners might not be able to shoulder all the chores themselves. Therefore, life insurance policies for non-working partners give their loved ones the funds to outsource domestic jobs.

Some Life Insurance Is Better Than None

Many young people don’t want to take out life insurance because they believe it’s too expensive. However, many coverage types are actually cheaper earlier in life, as the risk of critical illnesses is much lower.

Still, a Life Insurance Marketing and Research Association study showed that only 52% of Americans had coverage in 2021, and roughly 102 million needed a policy or more coverage.

But even taking on a less-than-required policy is better than not having a policy at all, according to financial experts. They recommend starting a policy with a death benefit of ten times the policyholder’s yearly salary.

With that said, some people should take out more or less than that, depending on factors like:

• mortgage payments
• savings
• debt balances
• childcare costs
• families’ medical needs

The bottom line is this — everyone with financial dependents needs life insurance, even when they’re only in their 20s.

According to a 2022 study, 41% of Americans say they either need to take out a life insurance policy or need more coverage. Perhaps more frighteningly, 44% acknowledge that their loved ones would face financial difficulties within half a year if a household wage earner unexpectedly passed away.

While they aren’t particularly pleasant statistics to think about, Domonique Rodgers of NC State explains that individuals can remove themselves from these figures by reviewing their life insurance coverage. 

Experts recommend that people review their life insurance policies at least once a year. However, this number should increase if any significant life events occur. Unbeknownst to the majority, policyholders can actually change their coverage at any time. 

Whether it be marriage, divorce, moving to a new home, children, or job changes, certain life events necessitate life insurance coverage reviews to ensure financial coverage for loved ones if the unthinkable happens. 

Key Times to Review Life Insurance Coverage

Job Change

Changing jobs can come with a plethora of new factors such as salary changes, which can impact the amount of life insurance coverage required.

On top of that, new employers may provide benefits that weren’t offered before, like death-in-service benefits.

Individuals should check which company incentives they can take advantage of and update their policies accordingly. That way, they can rest easy knowing their financial responsibilities are covered. 

Marriage

People getting married should consider reviewing their life insurance coverage to protect their spouse.

If a couple’s mortgage is the only thing they’re worried about, they may consider joint life insurance policies. Such coverage only pays out once to cover the debt, giving the newlyweds cheaper life insurance while they are alive. 

When joint policies aren’t preferable, individuals may want to change how their coverage is paid out, ensuring the proceeds go to their spouse upon their death.

Divorce

Divorce also necessitates policy changes due to financial impacts.

Joint policies aren’t necessarily divided, meaning one ex-spouse must decide whether to take over or start a new one. 

Beneficiaries likely change during divorces, too. So, a review is necessary to ensure the payout doesn’t head to the ex-spouse. 

Adding to The Family

Having a baby increases the number of financial dependents. Thus, ensuring the right life insurance coverage is vital to protecting the household. 

Some parents like to factor in childcare costs and school fees into their policy to give their children the best possible start in life whether they’re around or not. 

New Debt

Any time individuals take on new debt, they should increase the amount of life insurance coverage they have. That way, their beneficiaries won’t be saddled with unaffordable costs. 

Quit Smoking

Those who were smokers when they acquired life insurance can benefit greatly from letting their provider know they’ve quit. 

Of course, it’s fantastic for many health-related reasons, so individuals who’ve quit smoking for over 12 months are deemed non-smokers and save money on their life insurance policies. 

House Move

Finally, moving into a new house necessitates a life insurance policy review as there may be more debt to cover if a policyholder dies.  

Those with financial dependents need life insurance, not only because will they leave behind sorrow and grief, but because there will be monetary burdens as well. Life insurance coverage ensures heirs aren’t left to carry that weight alone.

Domonique Rodgers of NC State says that, while many people understand the need for life insurance, they grow confused when it comes to deciding what amount to take out. Some policyholders take out enough to cover the debts that will outlive them, while others choose larger death benefits to leave a bigger nest egg behind.

Calculating the Perfect Amount of Life Insurance Coverage

In general, financial advisors suggest overestimating needs in order to leave wiggle room for unexpected expenses. The following four common methods can help wannabe policyholders decide how much coverage to take out.

Needs-Based Calculation

The needs-based calculation is a comprehensive method, considering a person’s family’s existing financial requirements.

Those utilizing this approach must figure out the amount of money necessary to meet immediate obligations, then add it to the sum that’s essential for keeping the household afloat.

Here’s how it works:

1. Add together outstanding debts such as mortgages, credit card balances, medical bills, and student loans, and include final expenses (i.e., funeral, and burial costs).
2. Estimate future expenses, including the cost of maintaining the family’s current living standards.
3. Subtract savings and other assets. Many online resources provide easy-to-use calculators for this purpose.

The resulting figure is the amount of life insurance coverage required.

The 10x Rule

The 10x rule is perhaps the simplest way of deciding how much life insurance is needed. It just requires multiplying the household’s highest annual salary by ten. Thus, if a policyholder makes $80,000 per year, they’d require coverage of $800,000.

Naturally, the advantage of using this method is its simplicity. After all, ten times any income will work wonders to help left-behind relatives maintain their standard of living.

However, it isn’t all sunshine and roses.

One of the disadvantages of the 10x rule is its limited use. Policyholders may have provided their household with childcare help and other vital, valuable resources unrelated to their income.

Plus, it isn’t detailed enough to guarantee financial security for beneficiaries.

The DIME Method

DIME stands for debt, income, mortgage, and education. While it’s a more complicated calculation than the 10x rule, it provides more security.

To follow this method, soon-to-be policyholders should add their family’s monetary needs in each category to determine the amount of coverage required.

Human Life Value

The final approach estimates the amount of money the policyholder would probably earn in their remaining years, assuming they die of old age. It’s a method that considers everything from a person’s gender, to age, to annual wages, to potential income increases, and more.

Here’s how it works:

1. Add up likely future income from now until retirement. Include potential wage boosts.
2. Subtract a somewhat-generous estimate for living expenses and income taxes.
3. Decide how long heirs will require the earnings.
4. Use a life insurance calculator to figure out the death benefit.

The Bottom Line

Acquiring the right amount of life insurance softens the monetary blow at the time of the policyholder’s death, so utilizing an in-depth calculation is key to guaranteeing security.

Inflation is the increase in the average price of goods and services. During periods of high inflation, money buys a smaller percentage of both.

While the Federal Reserve tries to maintain a steady 2% inflation rate every year, the number falls dramatically during economic headwinds, such as those experienced during the coronavirus pandemic.

Domonique Rodgers of NC state says that no matter the type of inflation, it affects purchasing power — life insurance included. Despite whole life coverage being more expensive on the surface, term life insurance gives policyholders less than they pay for during recessions.

Protecting money from inflation is vital when individuals determine which life insurance coverage to purchase. Thus, understanding the impacts of inflation on both policy types is crucial.

Inflation Impacts

Inflation impacts each dollar individuals own, even more so with the money they attempt to save. The longer dollars sit in savings accounts, the more value they lose.

Financial planners encourage individuals to consider inflation when saving for retirement. And they’ll generally state that beneficiaries will receive less death benefit than initially purchased should the policyholder choose term life insurance.

Buying a policy with a 30-year duration and a $1M payout to heirs equates to just $411,987, provided the holder dies close to the end of their coverage. To ensure beneficiaries receive the total $1M, the holder would have to purchase an original death benefit of almost $2.5M.

Not to mention that if the coverage holder dies on the 31st year, beneficiaries get nothing, as the policy would’ve expired.

On the other hand, a whole life coverage policy comes with an ever-growing death benefit. The specific increase depends on non-guaranteed dividends and guaranteed interest, which averages around 4% to 6% per annum.

Therefore, the death benefit outpaces inflation, making sure beneficiaries get the full spending power.

Considerations

Inflation necessitates liquidity, but deflation requires keeping money safe. While that’s a tricky balance to strike, whole life policies ensure holders can do just that.

Interest and dividends allow whole life policies to earn cash. This is liquid capital, meaning it’s usable whenever necessary. But even when the holder borrows from the value, it grows, making every dollar work doubly hard to fight inflation during recessions.

On top of that, whole life coverage provides non-guaranteed earnings, depending on the insurance company’s performance. Policyholders are able to reap these rewards, and many insurers have paid consistent dividends to customers for almost 20 decades.

It’s evident that whole life insurance policies outpace inflation, giving beneficiaries increased security. In fact, they even grow faster than savings accounts, meaning they’re the perfect place to store finances.

Whole life policyholders are also offered bespoke tax advantages to keep even more wealth safe and balance inflations’ otherwise-devastating effects.

The Bottom Line

While whole life insurance is more expensive at the premium price level, it pays off in the end, ensuring holders have enough money to last their lifetime and beyond.

Life insurance provides policyholders with money for their beneficiaries in the event of their death. So, if they pass away, their heirs can claim on the policy and receive a financial cushion, typically providing them with more money than the deceased could give on their own.

But not all life insurance policies are the same. Significant differences between the two main types — whole and term — exist. One isn’t better than the other. It just depends on the living and financial situation of the policyholder.

Life insurance experts, like Domonique Rodgers of NC State, help individuals pick the perfect policy for themselves and their loved ones. But it doesn’t hurt to do independent research to establish the differences beforehand.

Whole Life Policies

Whole life insurance is permanent. In other words, they never expire, provided the policyholder keeps up with their premium payments. So essentially, they do exactly that — cover people for however long they live.

Within whole life policies, there’s also a cash value, which provides an additional source of funds for beneficiaries or tapping into for emergencies while the person is alive.

It’s the more stable option, as coverage never ends. However, the privilege comes at a price — whole life insurance plans tend to be more expensive than term life policies.

People pay more for whole life insurance early on, as the premiums remain stable throughout the policy’s duration (i.e., the holder’s entire life). However, as the person ages, the cost becomes cheaper than a typical term policy for older people.

On average, whole life insurance costs between five and 15 times more than term policies with equal death benefits. But many people appreciate the stability (and potential for withdrawals from the cash value).

Term Life Policies

Arguably, term life insurance is easier to understand than whole policies because it’s straightforward insurance without the cash value. Holders can’t withdraw money from the insurance early; it’s simply there to provide a death benefit for their heirs if they pass away.

Like other types of insurance, term life coverage is only valid for a pre-defined period. Typically, terms last between five and 30 years. Once the time is up, the policy expires.

These policies’ finite duration and simplicity make them much cheaper than whole life insurance. If people want a straightforward way to provide for their families when they die, they often choose term life coverage.

That said, the policyholder must pass away within the timeframe for the beneficiaries to receive a payout. If the person is still alive once the policy expires, they must take out a new plan. Because of their increased age, it will undoubtedly be more expensive than their previous coverage.

Most People Benefit from Life Insurance. But It’s Up to the Professionals and The Individual to Choose the Policy Type.

While both whole and term life insurance gives death benefits to heirs, whole life coverage tends to be more expensive. But many love the stability this increased cost provides.