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Life insurance for the young professional: What you need to know

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Scot Whiskeyman, partner and certified financial planner with Providers & Families Wealth Management, LLC
Scot Whiskeyman, partner and certified financial planner with Providers & Families Wealth Management, LLC - (Photo / )

Life insurance awareness month may have been in September, but with open enrollment quickly approaching, now is a great time to arm yourself with the knowledge you will need to determine what amount of coverage, if any, is right for you.

Your employer may offer you the opportunity to obtain, increase, or decrease your life insurance coverage. Which option makes the most sense? Here is a breakdown of what some common options mean.

Term life insurance vs. whole life insurance

It’s no mystery that the biggest asset a young earner has is there potential for income. However, it’s also no secret that many young earners are saddled with copious amounts of student loan debt, which puts a squeeze on their monthly budgets. This is where term insurance comes into play. Term life insurance pays a benefit in the event of the death of the insured during a set period in the in the insured's life. Permanent insurance provides lifetime-long coverage with a fixed premium and an investment component, therefore making it more expensive. Whether an individual has dependents or not, buying term insurance while healthy means it will be as cheap as it will ever get.

Why term life insurance?

  • It's affordable - you only pay to be insured for a specific amount of time.
  • In the event of death, it provides a lump sum of cash that replaces your income, covers the mortgage and other debts, and pays for college for kids

Now let’s talk about the different types of term life insurance and what to know about each. 

Term life insurance through work

Sample of MetLife’s group term insurance rates. Notice that the cost of coverage (quarterly) increases in five-year increments.
Sample of MetLife’s group term insurance rates. Notice that the cost of coverage (quarterly) increases in five-year increments. - ()

What to know:

  • Pricing is age-banded. It increases in price as you get older.
  • The coverage typically lasts as long as you are with your employer.
  • The employer can cancel the coverage on a non-discriminatory basis, meaning your company can’t cancel just yours, but it can cancel the insurance coverage altogether.
  • Your coverage is typically not portable, though it is sometimes convertible to a permanent type of policy after you leave your job.

My take:

I hear it all the time: "I have life insurance through work! I’m good, right?" Maybe. Having some life insurance coverage is better than having none at all. I often advise clients to get what they can, but not to depend on it. Why? In the event that you retire, become disabled and are forced to leave your job, or change jobs, your term insurance policy is probably staying behind.

Life insurance beyond the workplace

Why consider term life insurance beyond what you have through your job? There is power in ownership of a personal policy. Not only can it not be changed without your permission, but the coverage you get is often cheaper over a long period of time because it’s based on your health.

Another thing to consider is that change is inevitable. If you think there’s a possibility that you may one day work somewhere else, remember that that employer might not offer you insurance coverage at all.

Here are two examples of types of individual term insurance policies that you can keep, regardless of where you work.

Lion Life's rates per $1,000 of an annual renewable term policy issued on a 22-year-old.
Lion Life's rates per $1,000 of an annual renewable term policy issued on a 22-year-old. - ()

Annual renewable term life insurance:

What to know:

  • Pricing increases every policy anniversary. Thus it is extremely cheap when you are young, but tends to go up when you get older.
  • Good through a certain age – often age 95
  • Cannot be canceled by anyone but you
  • Can often be converted to permanent policy once you own it

My take:

The biggest lure of an annual renewable term policy is its price. When it comes to owning an individual term insurance policy, annual renewable term policies are often the most inexpensive way to go in the beginning. However, with a price that increases every year, it may not be the best type of policy to own over a long period of time.

This cost of this 20-year level term policy through Penn Mutual remains stagnant for 20 years but then jumps up dramatically in the 21st year.
This cost of this 20-year level term policy through Penn Mutual remains stagnant for 20 years but then jumps up dramatically in the 21st year. - ()

Level premium term life insurance:

What to know:

  • Pricing is level for the number of years stated in the policy. 10-, 15-, 20- and 30-year policies are common.
  • Good through a certain age – often age 95 – but the price increases dramatically after the level premium period expires.
  • Cannot be canceled by anyone but you
  • Can often be converted to a permanent policy after you buy it

My take:

Level premium term insurance is cheap when bought as a young person and stays that way for many years, sometimes up to 30. It’s for this reason I'm a big fan of level premium term insurance and favor it over annual renewable term insurance.

What else should you consider?

  • Don’t wait - life insurance policies get more expensive as we age.
  • More than a funeral: life insurance can replace your income and eliminate debt. Even if no one depends on you today, locking in a death benefit based on your health and age now could be wise if you plan to have a family in the future.
  • You’re likely healthier today than you ever will be again, so consider buying a term policy with conversion privileges. This allows you to change the policy, either in part or entirely (your choice) to a policy that will last forever.
  • Consider the strength of the insurance carrier. If you aren’t sure, ask a financial professional how to know which companies are strong and dependable.
  • Consider the insurance company’s history. Have they been around for 15 years or 150 years? History says a lot about a company’s commitment to its policyholders.
  • Consider the company’s product mix. If you think you’d like to lock in your health rating to convert to a permanent policy later, there’s no point in buying a policy from a company that doesn’t have a permanent product to begin with.

Scot Whiskeyman is a partner and Certified Financial Planner at Providers & Families Wealth Management, LLC in Camp Hill. His primary focuses are retirement planning for young and established professionals and estate planning for seniors. Scot lives in Carlisle, Pennsylvania with his girlfriend and business partner, Lindsey. He can be reached at scot@providersandfamilies.com.

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