By Regan Ervin and Stephanie Klein
UPDATE: Capital E Advisors is a fee-only firm and does not sell commission products.
It’s good to desire independence by way of fewer bills. But sometimes, your desire for freedom prevents you from investing in the future. Especially if you’re from the millennial generation, you may be familiar with the desire to prioritize freedom over planning.
But in my experience at least, I’ve noticed a new pattern emerging. Many millennials seem to be grappling with their own mortality since the pandemic began. This is evident by how many people are taking out life insurance plans, and even in the amount of estate planning we are doing.
So if you’re new to the topic of life insurance, and you’re starting to think it’s time to change that, you’re not alone. And that’s a good thing. It’s important to get familiar with life insurance plans and understand what they can accomplish for you and your loved ones.
The short answer to whether or not you should get life insurance? Usually—but not always. One thing I don’t recommend is getting a policy just to leave a person money. It’s not meant to be an inheritance policy. Think of it instead as a provision for the specific needs people relying on you will have in your absence.
Your need for life insurance correlates with the financial impact your death could have on others. So if you're a spouse, parent or caretaker, life insurance isn’t just a nice thing to do anymore. It becomes pretty important.
As you gauge your coverage options and needs, be sure to consider the following three categories of concern: your financial situation, the number of people in your life in a financial relationship with you, and what kind of policies you look at purchasing.
The more complex your finances are, the more you need a plan. Debts alone may not increase the need for insurance, but certainly having joint accounts or co-signed loans indicates you ought to have life insurance to keep your death from impacting others.
Here’s where marriage comes in—because if you’re married, you’ll definitely have someone else who is going to be held responsible for those unpaid debts you’d leave behind.
Do you have debts someone else will inherit? Are there liabilities (private student loans, car loan, mortgage, credit card debt) which may have been easily managed while alive and well— but upon your death the loss of income to the household would result in a heavy financial burden to your spouse?
Are there children you’re providing for? If so, you’ll need to consider future expenses the household may incur, and whether it’s beneficial to insure against those future liabilities. Education and weddings are two large expenses that you can secure for your children through life insurance.
I advise term insurance almost as a rule, but regardless of whether it’s a flawed practice by default, I am convinced that “insurance-as-an-investment'' is a problematic strategy.
The problem occurs when insurance and investing are lumped into a single product. It’s complicated and expensive, and typically, this isn’t evident to the buyer when purchased.
That's because insurance is a product that includes sales commissions for the advisor, who is not even required to tell you if they’re receiving one. The more complicated the product, the higher the embedded fees. In other words, permanent life insurance is more expensive, so the advisor selling it will get a better commission compared to the term insurance. You may sense the structural conflict with this formula: many times, a life insurance sales person is incentivised to sell you an inferior product.
There's a caveat (and maybe I’m being overly thorough here) but permanent life insurance could theoretically become more relevant if estate tax law changes get implemented by the federal administration. Currently, and for most individuals, I am an advocate of term insurance and often choose to spend extra time educating clients on how insurance needs change over time— diminishing significantly once one’s kids are out of college and married.
Many millennials seem to be grappling with their own mortality since the pandemic began.
Wherever you’re at in life’s journey, keep in mind that wise financial decisions generally happen when you have a long-term view of life. As you take this moment to account for the future, remember that you’re simply securing the freedom you value for a longer span of time.
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