Tiny Steps to Adulthood is back! This is the place where we figure out what all those mysterious, semi-arbitrary markers of adulthood actually mean, and how to achieve them. (Incidentally, can someone please write the Tiny Steps to Adulthood piece about small appliance repair? Right now, K is heroically listening to YouTube videos about how to fix the TV so I can use my mother’s Starz login to watch Outlander on the big screen. There is talk of a blown capacitor, and soldering.) At any rate, long-time reader Kayjayoh brought up another dilemma: life insurance.
I’d like to put in a request for a discussion about life insurance. It would be great for us newly-marrieds and almost-marrieds who are wondering if we need life insurance now, and what kind to get. My parents had a small whole life insurance policy on me when I was a kid. I took out a loan against it to pay for my first semester of college. Years later, during a period of unemployment, I discovered that I could either pay the policy’s premium as well as the loan repayment that had come due, or I could cash out the policy, pay off the loan, and still have some money left over to help get me by. So I did, reason being that I wasn’t married and had no dependents—why bother with life insurance? But now that I’m married, I’m not sure what to do.
What is life insurance?
Heretofore writing this column, I had a rather hazy idea that life insurance existed so that in the terrible event of my death, K could get a lot of money and use it to assuage her grief by eating paleo bonbons, or something. This didn’t really make sense, since it’s unlikely that coconut rolled dates could cancel out the loss of me, so based on that entirely unscientific reasoning I did not really think about life insurance, because I did not really think we needed it. (Yup, this is how I make my best decisions, folks.) When I posed this line of reasoning to Jay Northway, a friendly, smart insurance agent based in Delaware, he graciously noted that many people come to this same conclusion, and then spent the better part of an hour breaking life insurance down into easily digested parts.
As you might have suspected, life insurance isn’t meant for bonbons. Think of it like this: on the very worst day of your partner’s life, when the bottom drops out, you don’t want them to worry about whether they’re going to be able to float the mortgage on one salary, or whether the car might be repossessed if they fall behind in payments, or how they’re going to pay for a kid’s college tuition now that your salary isn’t coming in anymore—on top of the trauma and loss of losing you.
That’s why life insurance exists—it’s a safety net so that your spouse can deal with financial logistics in the event of your death. Maybe that looks like kid expenses, maybe you guys just bought a house, maybe it’s cleaning up the credit card debt you were planning to pay off, or selling your company, or even just the grim business of funeral or cremation expenses. Life insurance provides security that can help your person or people take a year off and grieve, rather than being forced into a position of hardship on top of a traumatic event.
What life insurance is not
Life insurance isn’t an investment, although lots of people use it as such. Your policy isn’t the place to put your money in the hopes that it will accumulate wealth throughout your life, because the returns aren’t going to be that great unless you’re rich, savvy, and lucky (three things I’m not, generally). Use your Roth IRA or 401(k) or joint savings account for that. Life insurance is a way to provide immediate cash to your spouse or the person you’ve tasked with handling your stuff after you die.
So what kind of life insurance, if any, should you get? Well, that depends on who you are, your assets, and what you want it to do.
Term Life Insurance
Term life insurance can be quite inexpensive (think tens of dollars a year). I think K and I will get this when we need supplemental life insurance, as we’re both lucky enough to get some through our jobs at the moment. Unlike whole life insurance (which I’ll get to in a minute) term life insurance exists for a specific amount of time, and payments are stable for the length of the policy.
This means that if we have a baby, I might decide to take out a 25-year policy so that I know that if I die, K will have a safety net coming to her to float a mortgage and college tuition payments. After that, I might reconsider, because hopefully that kid will be launched and we’ll have built up enough savings so that the loss of my salary won’t be a huge struggle for her. And term life insurance is cheap enough that we could incorporate it into our pretty tight NYC rental market budget. Based on our age, our health, and a bunch of other variables, we could probably secure a $500,000 policy for about $30 per month.
Whole Life Insurance
Unlike term life insurance, whole life insurance is good until you die, at which time it is paid out to your beneficiary. It has an automatic cash value (think of it like a savings account) associated with it, so your beneficiary could receive some interest or dividends along with the total value of the policy. It’s going to be more expensive to purchase than other life insurance policies, but that’s because some of your monthly premiums will be invested into building the cash value of the policy. A key reason to get a whole life insurance policy is that you, while still living, can borrow against your policy if you need to.
Some parents opt to take out these policies when their children are born, because in bleak, practical terms, if the unthinkable happens, then parents have a predetermined sum coming to them that would help with funeral expenses. If, hopefully, that does not happen, the policy ages as the kid gets older, and then the kid can decide whether to borrow against that policy. If your folks took out a policy for you, and you are unemployed or have bad credit or are strapped for cash, then taking out a loan against your whole life insurance policy is a great alternative to credit cards with sky-high interest rates.
But many experts discourage people from getting whole life insurance policies. It’s very expensive, and you’re not going to see a huge return on it, so sinking big sums of money into life insurance instead of an investment vehicle where you’re actually going to see returns isn’t always the best way to use your cash. For one thing, you hopefully won’t need life insurance when you hit retirement—at least if you’ve put the same amount you would have paid into your insurance policy into a savings plan with halfway decent returns. By then, you will probably have paid off any debt, you’ve built up shared retirement accounts so your spouse will have enough income to live, and your children will be grown and no longer dependent on you.
So what are we going to do?
K and I went through a very useful set of conversations as I was writing this column. We quickly determined that we don’t need whole life insurance. We have individual retirement accounts, and we don’t want to divert any money from those into a whole life policy. We each get some term life insurance coverage through our jobs, with the option to purchase more. When we both checked out how much we were getting through work, we realized that’s enough for us for right now. We don’t have a house or kids, we have no major health issues, and we’ve slowly, painfully, paid off my credit card debt. The life insurance that I would be entitled to should K die is $250K—meaning it would be more than enough of a cushion for me for the first few years after her death.
Wherever you end up, Jay stressed that it’s imperative not to get a policy that you can’t really afford or don’t need. “Don’t get life insurance that’s outside your financial reach. If you’re paying on a policy that you can’t really afford, and it becomes a burden and falls by the wayside, it’s not going to do what you wanted it to for the person you intended it for,” he pointed out.
There’s no right answer
I’ve broken this down by the two most common forms of life insurance, whole and term, but there are other kinds of insurance to consider too. There’s universal life insurance, which is a sort of hybrid that can be set up to expire when you’re eighty five (meaning it won’t run out like a term policy will), and there’s something called variable life insurance, which invests the money you pay into stock values. And now we’re reached the official limits of my knowledge about life insurance so I will say this: if you’re not sure about the right policy for your needs, find an insurance agent you trust.
How healthy are you?
Life insurance is dependent on a ton of variables like your age, and your health. Most companies will ask you to undergo a physical (and be wary if they say they’re going to charge you for this), and they’re likely to pull your medical records. APW Editor-in-Chief has this to say after her time at the life insurance rodeo:
Life insurance is a little like health insurance. If you’re getting insurance through a group policy at a job, you can smoke fifteen packs a day and you still get it at one flat rate because all those young healthy non-smokers are helping to cover your bill. If you’re paying for it on your own (say, you’re self-employed) the insurance agency is going to care quite a lot about those fifteen packs, and will charge you more, or could even deny you because of it.
But risk isn’t all base-jumping and smoking habits, as far as insurance is concerned. If you’re about to embark on a physically risky adventure (say, pregnancy) getting your insurance lined up first might be smart. We applied for supplemental life insurance for me after my pregnancy. (Let’s not think about the fact that I had zero life insurance during childbirth.) My first whiff of concern came when I had to answer, “Have you gained or lost more than fifteen pounds in the last year” with “Yes, I lost sixty-five pounds.” When I realized that looked like I might have an alarming health problem, I wrote an all caps note next to that that said, “BECAUSE I WAS PREGNANT LAST YEAR!” I ended up being denied not for that, but because I had experienced serious depression during pregnancy. Aside from the fact that this wasn’t super logical, as suicide isn’t covered, it points to bigger piece of advice. Lots of women have something an insurance company might deem a health issue during pregnancy, and childbirth isn’t exactly a walk in the park. So if you’re planning to get pregnant, look into life insurance sooner rather than later.
Optional: Find a good insurance agent
You don’t need an insurance agent to get a policy, so don’t let that become a roadblock. First, if one of you works a more corporate job, check to see if you can opt into life insurance as one of your benefits. If you can, do. It’s usually exceedingly cheap for a lot of coverage. (Please note these policies almost always terminate along with your employment, so if you leave a job or move on, remember to replace that life insurance.) Additionally, if you have access to a full-service financial institution (particularly one that you trust, like USAA), you can usually buy insurance directly through them.
But I find the jargon of insurance policies absolutely baffling, and would find an agent in a hot minute if we left these jobs and were looking to buy on our own. Jay noted, “Your insurance agent is making money in the process, so pick someone carefully who you trust. That person is going to steer you in the right direction for what your needs are. A good insurance agent is going to talk through every point with you, and make adjustments as necessary.”
Your next steps
The goal of the whole Tiny Steps series is to help you stop feeling bad about what you’re not doing, and break this stuff down into easily accomplished tasks. So here’s what I’m going to do in the next few months, and I suggest you do the same.
- Determine what your spouse or beneficiaries would need money for if you die. Do you have any outstanding debt? Kids? Mortgage? Car payments? Would you be able to afford to stay in your current community on one salary, or do you need a cushion so that you could float a home on your own? Do some thinking about what he or she would need to spend this cash on, before talking with an agent. Remember, you don’t want to spend money that’s not going to be needed in the end. You may decide you don’t need life insurance at all, and in that case I congratulate you on making a well-considered decision.
- Look into whether life insurance is offered to you through work. We both get a certain amount of term life insurance for free through our jobs, and we have the option to buy more for either of us at a deeply discounted rate. As with anything, make sure you read the fine print. Will it go with you to your next job, or do you need to replace it once you leave that position? Is it enough money for what you’d want it to cover?
- If you do decide you need life insurance, ask your family, friends, Facebook, and APW readers if they can recommend an agent licensed in your state or an institution that they trust, rather than getting lost in the Internet time-space continuum.
Listen, this is upsetting. I just spent this column imagining K heartbroken and stoically picking up the broken pieces of our lives together, after I die in a rogue public health policy accident. I’m scared of dying, and I’m scared of losing K. I don’t want to confront either of our deaths for many years. But K, who works in emergency response, often quotes to me that “disaster preparedness begins at home.” A little knowledge can feel incredibly comforting.
The information provided in Tiny Steps is intended by Elisabeth Snell and APW to serve as general advice and guidance for all readers. The advice herein does not constitute legal or financial advice, and Elisabeth Snell and quoted professionals do not take legal or financial responsibility for this information. Tiny Steps does not take the place of a consultation with a legal or financial advisor.