MoneyUnder30.com
Simple. Honest. Personal finance.
MoneyUnder30.com

How People in Their 20s and 30s Can Save a Fortune on Life Insurance

You might love your insurance agent, but that doesn’t mean she has your best interests at heart. Understand that some agents can only sell you the life insurance their company offers.

3851226754_e3dfe55ef2_zI don’t know about you, but I have a love/hate relationship with insurance companies.

I love them because they offer a very inexpensive way to provide instant protection for my family. I hate them because they manufacture other insurance products that rarely do any good for anyone other than the insurance company and its agents. They often sell junk that robs consumers of their money and leaves them woefully underinsured.

They should be ashamed of themselves for this. But let’s not throw the baby out with the bathwater, friend. Assuming you do need life insurance, here’s how to save serious dough.

Don’t assume

Do you really need life insurance? Maybe not. If nobody depends on you financially and nobody is ever going to look to you to support them, why buy life insurance? On the other hand if there are people who rely on you, life insurance is a must in my opinion.

Shop around

You might love your insurance agent, but that doesn’t mean she has your best interests at heart. Understand that some agents can only sell you the life insurance their company offers. Other agents broker for a variety of companies. You want to work with brokers who represent many different companies. This is even more important if you have a health problem and need life insurance. Just ask your agent what companies they work with before you go too deep into the process with the agent.

Go with term life insurance

If you are 20 to 39 and you need life insurance, it’s likely because you want to protect your family against the risk of your premature death. If that’s the case you will get between seven to 10 times the protection for every dollar you spend on term rather than whole life. There are a variety of reasons for this, but suffice it to say that if you want to obtain the most coverage for the least cost, term life insurance is for you.

Life insurance is not for kids

If you have children, don’t let some slick insurance agent crowbar you into buying life insurance for the kids. Life insurance is a tool that is meant to protect people against a financial loss. Your kids don’t need life insurance because they have no income. While losing a child is a loss greater than words, life insurance for kids is almost always a waste of money. Save the premiums and invest for college instead.

Getting the right amount of life insurance

By far the greatest way for you to save big bucks on life insurance is to buy the right amount for the right time. Term life is super cheap while you are young. Figure out how much you need and get it. Stop thinking about it and just do it. But keep in mind that by the time you are 60 or 70, you probably won’t need as much life insurance — if any at all. Hopefully by then your assets will grow and your financial responsibilities will decline.

I started buying life insurance the day my eldest daughter was born. I bought more every few years as my family grew and as our spending increased. But each time I bought more insurance, I bought it for a shorter term. If you are 35 now, you might buy a 30-year policy. Then, when you are 45, you might buy a 20-year policy. That keeps the cost down and the coverage high. This kind of insurance plan assumes that you won’t need the coverage once you reach age 65 (because you’ll cut back on spending and have a fully-funded retirement account).

Your approach will probably be a bit different. But the point is to tailor a life insurance strategy based on your needs –- not the needs of the life insurance agent. Figure out how much you need and how long you need it. Then, shop around with a variety of companies who offer you term insurance and stay away from the sharpies who push whole life and/or insurance for children.

These are the four best steps you can take to save serious cabbage on your life insurance. What is your life insurance approach? Are there other tips you can provide to help us?

About Neal Frankle

Neal Frankle is a jolly fellow and Certified Financial Planner (CFP) from Los Angeles. He runs the financial advice blog The Wealth Pilgrim and co-owns the life inusrance Website MCMHA.org.

Comments

  1. Confused says:

    My fiancee and I are getting married in a couple months and we are trying to determine what amount of life insurance to get on each other, but don’t really have any idea as to the amount of coverage we should be getting. Any good resources you can recommend on that?

  2. This is quite an eye opener on insurance. I have always thought and assumed (quite wrongly) that life insurance is an absolute must! But reading this, I think am better off exploring term insurance since I don’t have dependants yet but I need some sort of protection all the same. Thanks for sharing this…really helpful!

  3. I’m a big fan of term life insurance, since it has relatively low premiums and can provide great protection. I think that everyone, even people without kids, should get it … after all, if you pass away, you’ll still have a spouse who might need help paying the mortgage and taking care of other expenses that you used to chip in for, or you might have a family that will need to pay for the cost of burying you and other funeral expenses. A small bit of life insurance can help.

  4. Any idea on how to come up with the right amount of life insurance? I want to get a policy but have no idea what the right amount would be.

    • Steve,
      It depends on what you’re trying to cover. Minimally you want enough to cover any debt you may pass along to significant others plus final funeral costs. Usually the most aggressive amount you would get is to take the present value of all the money you would make between now and when you’re going to retire. If you’re under 30, that will probably boil down to 20 times your current gross income. If you are 40+, 10 times your income usually covers it.
      -Chris

    • I was an Insurance Agent in a prior life and we were told that you needed to add up your income for however many years you would need the insurance for (say until your kids get through college) and then add in debts such as credit cards, car payments, and mortgages as well as college funds for your kids.

      After taking a closer look at this I now see that adding in your mortgage, car etc. is not necessary. Your family currently lives off of your income, and therefore your income is really all you need to replace for however many years your family would need it. If you were to pass away having your income replaced over many years in one lump sum would allow your spouse to sell your house and buy a new one if she wanted to; there is really no reason to add your entire mortgage to the total.

      Another thing I recommend is getting someone to council you and your spouse on how you would invest/spend the money after you received it in a lump sum. A death in the family is extremely stressful and you don’t want to be in a position where you receive a huge lump sum of money and you have no idea what to do with it.

  5. I can’t agree with you more: Just go and get it. There’s no reason to wait and let the premium rise. Lock it in now. One of the biggest gripes from folks later in life when it comes to insurance is they wish they had gotten it sooner. It’s not necessarily a pleasant thing to buy, but do it now and you won’t need to again for a very long time.
    Not to mention your family will be protected.

  6. My simple rule about life insurance: you need it as soon as you have a financial dependent, and not a minute before. You stop needing it as soon as your net worth is high enough to provide for those dependents (i.e. your will becomes your life insurance) and not a minute longer. And you don’t EVER need any kind of life insurance except term.

  7. I think that it is also important however to remember that by puchasing it at an early age, whether or not you currently have dependents, you are establishing insurability. Many life insurance policies will either exclude pre- existing conditions and/or refuse to offer coverage all together based on your medical history. Purchasing the coverage while you are insurable is a key to ensuring you are able to provide protection in the future. Don’t wait until it is too late (ie. you develop type 2 diabetes, a heart condition etc.) I do agree however that for these types of situations term life insurance is the best bang for your buck.

  8. My husband and I are hoping to start a family soon. We’ve agreed that we will purchase life ins. once we have children. I’ve been told that Whole Life insurance plans are good retirement tools because the money you put in can be taken out after you reach a certain age… Similar to a 401k plan. Is this correct? If not (or even if so), why do you recommend against Whole Life plans?

  9. I sell Life Insurance, and I work for one of the Fortune 500 companies that do. I also have 2 degrees in finance, and actively manage money as well.

    #1 don’t use a rule of thumb to calculate how much you need. Your situation is different than Joe Bob, your neighbor. It takes 5 minutes. Don’t be lazy about something so important.

    #2 the debate between WL and term will never end so let me just say that I ask a client how much they want to allocate towards this specifically, I blend the coverage based on their needs, and ask for their feedback. Most WL products are pretty weak so you need to do your homework if you want something permanent. I actually hated it until I sat down with enough clients to understand why it might be nice to have…

    A) when you retire, your nest egg will still be in the market or your business with the exception of a little cash (I hope). Does it make sense to have 1-2 years worth of expenses in something that has no correlation to a market dip/crash? (Don’t tell me bond funds won’t lose money) You can argue real estate or foreign markets have less correlation, but a positive correlation nonetheless. B) what tax bracket are you in? You can only put so much into a ROTH, but there are some loopholes there. When you’re in retirement, having some tax free income can lower your tax bracket with regard to what comes out of your pension and 401K. The idea is you have plenty of tax deductions now..a mortgage, kids, charity, other loans, etc. but you won’t have most of them when you retire.

    If your argument is to buy term and invest the difference, that’s fine. That’s Your risk tolerance, not someone else’s. I personally have $500k WL and $1MM in term in case you were wondering. I use MF’s, ETF’s, and individual stocks as part as my personal portfolio as well. You should never rely on just 1 product or service for retirement, and you should look at all the variables involved with planning.

    As for the idea of insuring your child, I’m a little indifferent. Do you want your child to have some permanent coverage when they grow up or is that their problem?