6 Reasons Millennials Should Consider Life Insurance

If you are a young person, you may be thinking “Why would I need life insurance?” I am young and healthy and I do not have anyone depending on me.

It is easy to fall for the trap that life insurance is only for older working professionals with families but there are several benefits to life insurance at every age including when you are young.

Most people hear life insurance and they immediately think about death - mainly because the key underlying feature of this coverage is the “death benefit”. This is the one-time, lump-sum, tax free payment that goes to the beneficiary of your choosing when you die. 

While this death benefit coverage is a great feature for our loved ones, it is not the only benefit of life insurance. There are several other “living benefits” that can be realized and enjoyed while you are living regardless of your age.

We are going to talk about 6 particular living benefits and why Millennials should consider life insurance.

It is worth noting that there are several different types of life insurance including term (temporary) and permanent (whole life, universal life etc.). For the purposes of this article we are discussing Permanent life insurance which is in place for your “whole” life. 

1. Flexible Savings Asset

Insurance in its purest form is simply a hedge against risk. It might be home, auto, property, or health insurance - all that insure the risk of something happening to an asset. That asset could be your car, your home, your body or someone else’s property. You pay a premium every month and in return the insurance company provides you with coverage IF something were to happen. 

If you never get into an accident or file a claim to use the coverage, there is no rollover or accumulation. This premium is purely an expense. 

Life insurance however, functions a bit differently. Because the only event that life insurance covers is death, the premium payments you make can actually accumulate if the policy is structured properly. 

For example: let's say you are 28 years old and you take out a $500,000 death benefit policy. You have been making payments of say $200 per month. With properly designed policies, $50 of that would go to the insurance company for “coverage” (buying the death benefit) while the remaining $150 would go into what is called cash value. 

Cash value is the secret sauce of life insurance. Think of it like equity in your policy that functions like a savings account for you. Cash value is powerful because the insurance carrier treats this money like your own personal savings account. They give you:

• A guaranteed annual interest rate on the cash value between 1-5%
• The gains on the cash value are tax deferred and never have to be realized if you do not withdraw them from the policy
• They are also 100% private. A life insurance policy is a private contract between you and the insurance carrier. Any cash value amounts, death benefit or other features do not need to be disclosed on balance sheets or to creditors if you do not want to. In most states, this means the cash value you store in a policy is protected from creditors, bankruptcy and even lawsuits. 

Most carriers also provide a unique feature called a policy loan in which you can tap into your cash value at any time by taking a loan out up the 95% of the balance of your cash value. By using a loan, you can access guaranteed growing cash without incurring any of the capital gains taxes normally associated with an investment account. 

The guaranteed growth, tax advantages, liquidity, privacy & protection are why you see many many ultra rich families, corporations and big banks storing billions of dollars in life insurance products. They see it as a safe, liquid asset to store cash that they can use on their terms all while setting up their beneficiaries for a large lump sum death benefit payout in the future. 

2. Future Family Planning

If you do not have children yet, but intend to, it is never too early to start saving and having a plan in place to protect your loved ones. If you will be a working adult who’s income will be used to support a spouse or children, life insurance is an important protection element to have in place. 

As a contributing member of society, your income and contribution have inherent value. Lets say you make $60,000 a year and you are 28 years old. If you work until 65, you will make roughly $2,500,000 over the course of your lifetime. That income is an asset that your family counts on to survive, therefore that asset can be insured in case it goes away upon your death.

College tuition, vehicles, and general living expenses rack up quickly and can be hard for most Americans with two working spouses. Imagine if you were to take one of those income sources out of the equation permanently. Significant financial loss and hardship would be inevitable. 

A life insurance policy with say a $1,00,000 death benefit would provide your spouse and children a one-time, tax-free cash windfall should you die prematurely. This death benefit payout can be used by your family however they see fit. 

The added benefit is the payments you make into policies cash value are also a great savings account to be leveraged during your living years. 

Lastly, while it may be hard to fathom now, it is important to consider your legacy planning. Your assets - property, investments, cash accumulation etc. must be divided and passed on to the next generation when you die.

In most cases, without a properly designed legacy pan, family members incur a significant inheritance tax when they inherit the assets of their parents or family members. This tax bill can erode the vast majority of the assets and can cause significant complications for the beneficiaries.

A properly designed life insurance policy however, can tidy up the inheritance into a one-time lump sum death benefit that will be realized tax-free avoiding the major tax implications. 

3. The younger you are, the lower the cost

Life insurance premium costs are calculated by a number of factors including your health rating, your income and more importantly your age. Assuming you are healthy, the younger you are, the lower the cost of the overall insurance will be. This is because the insurance company is simply using calculations to determine the likelihood of your death and what liability they would incur.

The odds suggest that a younger person has a much lower likelihood of dying than an older person therefore the carrier can spread out the cost and offer you a lower overall premium expense. 

With this in mind, it generally makes sense to get a life insurance policy as early as possible because it only gets more expensive with each year that passes. When you secure a policy in your 20s or 30s, you are locking in that current year’s age and health rating for the life of the policy. This can lead to hundreds and even thousands of dollars of savings on premium expenses. 

Bear in mind that your health rating is also a major contributing factor. If you are a smoker, tobacco user or have significant health complications, you will receive a lower health rating and therefore a more expensive premium.

4. Health Care Coverage

The majority of Americans have health care coverage provided by their place of business to help with preventative care and general health services. What most people do not realize though is the significant costs that are incurred towards the end of one’s life for long term care. 

Government aided programs like Medicaid and Medicare do not always provide adequate medical coverage to support long term care needs or chronic illnesses. 

A properly designed life insurance policy however, can allow one to use provisions like the Chronic Illness Rider, Accelerated Death Benefit Rider and Long term care Riders. All of which allow one to tap in and actually access some or all of their death benefit while they are living to use for medical expenses. 

Most death benefits are 5-10x the premium that was paid so this can be a large sum of money that is accessible in the most critical of circumstances. 

5. Debt Protection

The average American has about $90,000 in consumer debt including things like student loans, mortgages, car loans and credit cards. Most millennials have significant student loan debt that was cosigned or guaranteed by a parent or loved one. What most people do not realize is that if you were to die, debt like cosigned student loans would land on your loved ones to be responsible for paying off. 

Luckily having a properly structured life insurance policy will provide the one-time lump sum financial payout to satisfy those outstanding debts and not add any further burden to your loved ones. 

The same goes for expenses like vehicles and mortgages. If you were no longer in the picture, your spouse or future family may not be able to afford those payments. A death benefit payout can make your family whole again and insure they do not forfeit their lifestyle with your passing. 

6. Supplemental Retirement

Most millennials may be offered some sort of retirement plan at their place of business like a 401k or IRA. 

While company matched contributions and storing cash in a tax advantaged account is certainly a great option, there are some downsides to utilizing one of these accounts. 

The main disadvantage of these qualified retirement plans is that they are very restrictive on purpose. Average Americans have proven that they are not well equipped to save money for retirement, so the Government created tax-advantaged accounts that put savings on autopilot. 

For example, one restriction is that they lock you in to pre-tax contributions. This means that the contributions you make into the accounts are done so BEFORE your taxes come out of your paycheck. What that means is you are not paying taxes on that cash now so you will be paying that tax in the future when you go to use that money in retirement. 

With the stimulus plans and government spending, there is a very high likelihood that taxes are going to go up in the future. So therefore you are forfeiting a cheaper tax bill now, for a much more expensive tax bill in the future by paying in with pre-tax dollars. 

Some of the other disadvantages can really be summed up by one thing: control. Because the government wants to incentivize Americans to save for the long term, they make accessing the cash you have in your qualified retirement accounts as hard to do as possible. 

While in theory, that can be a good thing, it can be problematic for those who have extenuating circumstances or have simply would be a more profitable investment they want to take advantage of and want access to their money or their terms. 

There is also the challenge of what is called a Required Minimum Distribution. This is a feature that requires that one access a minimum distribution from their qualified retirement plan once they hit a certain age, typically 70 ? years old. This is a threshold and amount that is determined by the government and not something you have control over. 

This is where a life insurance policy can be a great supplement or alternative to a qualified retirement plan. Life insurance policies are paid with AFTER tax dollars so one would not incur a tax bill in the future on the cash value of a policy if used properly. 

Secondly, the cost basis (money you have paid in) and cash value is accessible via a policy loan day 1 and anytime afterwards on your terms without a cost. This gives one much more control over when, how, where and why they use their money compared to a traditional qualified retirement account. 

Lastly, qualified retirement accounts typically have one thing in common in terms of where the funds are invested: the stock market. This could be stocks, bonds, mutual funds among other types of equities. As a whole though, these accounts are tied to a market index which means they are subject to the rising and falling of that market. 

Traditional life insurance cash values however are what are called “non-correlated assets” which means they are not tied to any sort of index. Therefore the guaranteed interest rate paid on the cash value of a policy is made regardless of what happens in the stock market. 

This makes life insurance an excellent supplement for diversifying your long term savings & retirement plans. It also has the added benefit of providing a tax-free one-time large lump sum payout upon your death to your family which certainly helps secure the next generation and your loved ones futures.