As the old saying goes, there are only 2 things guaranteed in life – death and taxes. Unfortunately we only really know the timing of one of them – taxes. Timing on death on the other hand is unknown, and all we can really do is either prepare for it, or not. Although there are lots of ways that you can prepare for death (as morbid as that sounds), the two most common ways that young professionals should prepare (and I believe you should), are having a Will and getting life insurance. I’ve already done a pretty lengthy post on having a Will and why it’s important (like for real, it’s important and not that hard to do). I would like to do a follow-up on life insurance and share some of my thoughts. I’ve written an article or two in the past but now having a kid, ideas and views can change!

How life insurance works

If you were to pass away, there could very well potentially be expenses that need to be taken care of. Funeral costs are the immediate ones that come to mind, and arranging for a funeral and getting buried isn’t free. Outside of that, there could be debts that need to be paid, perhaps a house that you co-own with a loved one. That potentially could be a lot to leave for them. Even more than that, when kids come into the mix, the burden we’d leave behind grows even more. Daycare isn’t cheap, and also to consider is what your partner’s life would look like without you around (income related and not-income related). 

Life insurance is meant to replace not only your worth today, but also your earning potential. It is a large sum of money that is given to your designated beneficiary in the event of your passing. Potentially depending on your life situation, there could be those that count on you as an income-producing member of the family. A life insurance payout is meant to ensure that those that count on you can continue on with the life that you’d like them to be able to lead. 

Types of life insurance

There are two main types of life insurance; whole life and term life. Term life is the simpler of the two and is similar to other types of insurance you’re familiar with (auto and health). You signup and figure out how much coverage you’d like, and the insurance company might ask a few questions, or potentially have you (or your doctor) complete a health screening. They’ll then tell you the premium you’ll have to pay. A common example of this could be getting a $100,000 10-year term-life policy for $9/mo.  That means that the insurance company is offering you $100,000 in case you die. They’ll give you this policy for 10 years, as long as you pay $9/month. In total, you’ll pay $1,080 in premiums over the 10 years, all for $100,000 in coverage. However, at the end of the 10 years, if you don’t die (hope you don’t!), you’ll walk away with nothing, that $1,080 is a sunk cost. 

Whole life on the other hand has a cash value. It’s going to be much more expensive per month, but there is a value if you stop paying for it, or once you reach the end of the term you can use that cash value to carry the policy on, or potentially cash out. Whole life is a mix of an investment and life insurance. 

How to think about how much you need

How much life insurance you need is the proverbially million-dollar question. How much value should you place on your life, or the life of a loved one? I think the short answer is you can’t. No amount of money could ever replace you or a loved one being gone. However, there are ways that you could make your absence a little easier to bear, and that’s with life insurance. The question then becomes, how much should you get?

I’ll go ahead and cut to the chase with my thoughts on how much you need, then we can pull back and review. 

• If you’re single, just a small policy of $25K or $50K will be enough. Leave enough behind for funeral, burial and any closing up costs that may occur.
• If you’re married, don’t own a house but no kids, have a policy of $100K. There will likely be a little more cleanup costs, and your spouse may want to take time off to grieve. This could vary depending on whether or not your spouse works, and their income compared to yours.
• If you’re married, own a house but no kids, consider a policy of more like $250K, or enough to pay off the house. Your spouse may end up selling the house, but it’d be nice to leave them enough not to worry about making the mortgage payments, which are often a big chunk of the monthly budget
• If you’re married, own a house and have a kid(s), it’s time to get serious about life insurance. You’ll need at least $500K, or more like $1M+. Raising kids together is expensive, so imagine doing that all by yourself if your spouse passed away. Have a conversation about the actual amount and what that should entail, i.e. Paying off the house, paying for all daycare, private school, college, enough to have the spouse not work…all things to think through.  

These are just my thoughts on how much young professionals need. As young professionals, we don’t have a ton of experience with dying, but might have some examples in our own lives that we could point to. Take some time to reflect on what you’ve seen others do, how much they’ve had or needed, and discuss with your family. Mrs. Money and I have had candid conversations on what losing one of us would look like, and how much we’d like the other to have, and how much we’d think they’d need. 

I will say that I believe my estimates to be quite conservative, and I’m sure if you talked to a financial advisor or insurance salesperson (like my mother-in-law if she reads this), they’d pull their hair out and tell you I’m an idiot for thinking that much would be enough. Take their advice with a grain of salt and try to step back and adequately evaluate the risk. Yes the loss of life would be terrible, but just because it’s terrible and you might think more money could help, that doesn’t change the risk of loss. 

How I approach this 

I’ve had a real inner struggle with life insurance, especially whole life insurance. I grew up listening to Dave Ramsey and although I don’t agree with him on everything, not buying whole life is something that’s always stuck out to me. As such, I’ve only ever had term-life insurance. It’s much more affordable and more importantly – it’s easy to understand. I’ve never understood whole life insurance, and the more I read into it, the more confused I get. Not to brag, but I feel like I have a good grasp on finances and investments and understand how they work. Not with whole life! What’s worse – every time I talk to a ‘financial advisor’ (who I’ve come to learn is often just an insurance salesperson in disguise), I just a) get more confused and b) feel a ton of pressure. I’ve heard that insurance agents are paid way more on whole life policies vs term life, and that’s why they pressure you so much. I’ve also heard that on average, the ‘returns’ on whole life policies aren’t very good at all. To me, I’d rather keep my insurance products being insurance products, and my investment products being investment products. *Note – if you’re a ‘financial advisor’ reading this and desperately wanting to sit me down and explain the differences, please don’t, I’m not interested in what you’re selling. 

As such, I’ve only ever had life insurance through work. I’ve been fortunate enough to have worked at companies with good benefits and often affordable term life insurance comes with the benefit. I pay extra for more coverage on myself, and some additional for Mrs. Money too, and a dollar or so for a little coverage on BabyMoneyFinance. Mrs. Money has some coverage through work as well. Why is that what I do? As I said previously, I don’t understand and therefore don’t trust whole life insurance. I feel pressured whenever someone tries to explain it to me. As such, I keep my investments as my investments and my insurance as my insurance. I only have coverage through work because it’s a good deal, and I feel confident that if I was ever at another company that didn’t offer it, I could get a fine deal in the open marketplace. I don’t have a TON of coverage as Mrs. Money and I are confident in our assets right now to cushion any loss, and we feel like we’ve appropriately accounted for the risk of loss. I sleep fine at night, knowing that I’m not paying too much right now, I’m not stuck with the feeling that I’m getting ripped off, and I know that if I or Mrs. Money passed, the family would be ok. They obviously wouldn’t be great, and it wouldn’t be like they ‘won the lottery’ but we’d be ok! 

Summary

No one likes paying for insurance until they need it, and life insurance is one of those things that you should have. Go into any conversations with ‘financial advisors’ that might just be insurance sales reps in disguise with an open eye, and do research before/after to compare. Have enough coverage to make you comfortable, but shop around so you don’t overpay! Finally, get a policy you understand and don’t leave with a queasy feeling – either feeling confused, or that somehow it’s too good to be true.