Personal Finance

Why a millennial should have life insurance

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Millennials have plenty on their plate as they save for retirement and pay down loans, but here's another concern: Do they have enough life insurance?

It's no secret that 20- and 30-somethings are holding off on some of the traditional milestones that would warrant buying life insurance. The median age in 2015 of individuals getting married for the first time was 27.1 for women and 29.2 for men. The mean age for women having their first child in 2014 was 26.3. This age group has also postponed homeownership.

Nevertheless, there are several reasons why you might want to consider taking out a life insurance policy when you are young — and you can do it on the cheap.

"Most of Gen Y thinks that they're invincible," said Chad Chubb, a certified financial planner and founder of WealthKeel. "The fact of the matter is that most 20- or 30-year-olds will require life insurance at some point."

Protect your co-signers

Though outstanding federal student loans are discharged when you die, this isn't always the case with private loans. So when a borrower with a private loan dies, the co-signer may be on the hook for subsequent payments.

Even if your spouse doesn't co-sign for you, he or she can also be held liable for a private student loan if you borrow while married and you reside in a community property state.

Term life insurance, which provides coverage for a stated period of time and at a relatively low cost, can help protect against that. Presumably, the borrower will have paid off most, if not all, of the loan by the time the policy's term has ended.

"I find that when I'm working with people in their 20s and later, the amount of student loan debt I see is considerable," said Peter Creedon, founder and CEO of Crystal Brook Advisors.

One client of Creedon's in her 30s is planning her wedding, and she's bringing $130,000 in student loan debt to the marriage. As part of an overall financial plan, Creedon recommended that she purchase $150,000 of life insurance in a 20-year term policy.

Term coverage and costs

The cost of coverage was low compared with the amount of protection Creedon's client received: Premiums were $167 per year.

Financial education and management website NerdWallet provides a tool for modeling term life insurance quotes. Based on that, a 30-year-old woman who doesn't smoke can purchase a $500,000 policy for 20 years for an estimated monthly premium of $18 to $28. Other sites that can give you an idea of how much term life costs include PolicyGenius and SelectQuote.

When buying a term policy, you likely will have to answer a few questions about your health and whether you smoke. You probably won't be required to take extensive medical testing before an insurer agrees to provide you coverage.

Term is different from permanent life insurance, which doesn't expire after a stated period. Permanent coverage includes whole life, universal life and variable life. These policies may be best suited for estate planning and retirement income strategies.

Protect your business

If you're joining or starting a small business, term life insurance might also make sense.

This was the case for Douglas Boneparth, partner at Longwave Financial. At the start of his financial planning career, he worked at his father's firm and set up what's known as a key-man life insurance plan.

Key-man policies cover the lives of critical personnel. They provide the business with the resources to recover from financial losses in the event of an important employee's untimely death.

When determining the type of policy they need, entrepreneurs need to think about the end goal of the business and how long they plan to stick around, Boneparth said. "What if the parents want to sell the business in less than 30 years?" he asked. "If that's inevitable, 30-year term might suffice."

How much do you need?

A financial planner can help you figure out the amount of protection you'll need. Life insurance shouldn't come at the expense of other major priorities, including paying down student loan debt and funding your 401(k) plan.

"We don't want to stress someone with insurance," said WealthKeel's Chubb. "We get what can fit into the budget, while caring for other priorities."

One thing to keep in mind is the amount of coverage you'll need even if you have group life insurance at work. You may lose your coverage if you leave your employer. Some companies offer group life insurance that you can convert to an individual policy and pay for on your own after you've left.

Boneparth has three key considerations for young purchasers:

  • How much coverage is appropriate?
  • How much can you afford?
  • What are the policy's features?