A Financial Advisor’s Life Insurance Tips for Millennials

A low percentage of people ages 18 to 34 — along with their counterparts in the preceding Generation X — believe they are likely to ever purchase life insurance, according to a 2015 study by life insurance research group LIMRA. It’s understandable: When you’re young, the last thing on your mind is what your heirs will do after you’re gone.

But if you have certain financial obligations, you’ll want to have life insurance, especially if you’re buying a home or starting a family.

Life insurance is simple enough: You pay a premium and your heirs receive a lump-sum benefit after you’re gone. Whole life insurance remains in effect for life — provided you pay the premiums — and has an investment component. Term life insurance, which is more affordable, covers you for a certain period of time, such as 10 or 20 years.

Deciding whether you need life insurance might seem like a consideration separate from the rest of your financial plan, but actually it ties into many other financial decisions. We asked Brian McCann, a financial advisor and a member of NerdWallet’s Ask an Advisor network, what else millennials should know when it comes to life insurance.

Why do so few millennials expect to buy life insurance?

I suspect if you asked any generation at age 18 to 34 if they thought they needed life insurance, a low percentage would say they did. Certainly when I was that age, insurance was the least of my considerations.

But marriage, a mortgage and children have made life insurance a part of our financial planning, and the same is true for many millennials. When you are young, you spend much of your energy focused on your own personal situation. As you get older, you worry more about others in your life. Life insurance is fundamentally not about you — it is about the others in your life who you care about.

What should millennials know about the advantages of life insurance?

While they may not be a able to envision it now, many who are in their 20s and early 30s now will go on to:

• Have children that they would like to financially protect.
• Start a business with partners. They may want to protect their partners and themselves in the event of the death or disability of one of the team members.
• Go on to be wealthy and want insurance for estate planning purposes.
• Have family members that have special needs and will need ongoing care for their entire lives.

Insurance can be used to transfer risk that has a very low probability of happening, but would be catastrophic if it did, or protect against something that is certain — such as death — but has unknown timing.

How should millennials decide which kind of insurance to buy?

Most insurance needs have a time limit — for example, you need to insure yourself so that your kids can be cared for while they’re young. Once they’re old enough to fend for themselves, you don’t need to carry insurance anymore. This would point toward purchasing term life insurance.

If you will definitely need permanent insurance, rather than term insurance, because you have an issue that needs liquidity after your death, then you should buy it. Permanent policies such as whole life insurance are more expensive for a reason: They are designed to always pay out. That’s why it contains an investment component — it needs to generate returns capable of paying for the insurance into old age and through death.

There is no reason that people can’t have multiple insurance policies to handle multiple issues. For example, having term insurance when your children are young that would cover through their college years is common. That might be coupled with a whole life policy that is for business continuity purposes. This policy would give the business partners the liquidity to buy out a partner in the event of his or her death, providing heirs with cash in lieu of a business interest.

In which cases should millennials avoid getting life insurance?

You should almost always avoid insurance if:

• You are young, single and you have no dependents.
• Someone is trying to sell you insurance as a “retirement” strategy and you haven’t maximized your tax-advantaged contributions to 401(k), IRA and Roth IRA plans.
• You experience high-pressure sales tactics. Insurance is often sold as opposed to bought. In other words, a salesman is making a case — sometimes very convincingly — as to why someone should buy it. My view is that insurance is just a tool to solve particular problems, and you shouldn’t be pressured into buying it without a clear understanding of the costs and benefits.

Brian McCann, CFP, is a financial advisor and the founder of Bootstrap Capital LLC in San Jose, California.