Certified financial planner Sophia Bera answers:
I'm in my 20s and I've heard that I need life insurance. I don't have kids, though, or a large amount of student loans ... do I still need it?
There is quite a bit of conflicting information in regards to life insurance.
I'd like to start with why you'd need life insurance. If you were to pass away, is there someone who depends on your financially that would be unable to support themselves (i.e. do you have children, a spouse, or a parent that you support?)? If not, you probably don't have a strong need for life insurance.
There are many different types of life insurance. As a millennial, I don't think there's any reason to buy anything other than term life insurance. I'm not a fan of whole life insurance or any other fancy types of life insurance like universal life, variable universal life, or anything besides term life insurance.
The reason is because I believe insurance should be used for protection planning and you should invest for retirement through retirement accounts (i.e. Roth IRAs, 401(k)s, 403(b)s, etc.). I don't recommend that you try to do both by having a fancy insurance policy. In my opinion, it's very expensive to blend the two and there are high fees associated with these policies.
If you determine that you need life insurance, you can take out a 20 or 30-year term life insurance policy and get much more coverage than you can for the monthly premiums on a whole life insurance policy with a far lower death benefit.
It's better to get hundreds of thousands of dollars in additional coverage with term life insurance than to have an insurance policy that is slowly building up cash value. Also, did you know that oftentimes your insurance agent's commission on whole life insurance is equal to 100% of the first year of your premiums? That's why your buddy from college wants to sell you whole life insurance! Here's a great article of why to avoid whole life insurance.
Many companies offer group term life insurance equal to 1-2 times your salary as part of their company benefits package. If your company does, make sure you name a beneficiary for this policy. A beneficiary is the person who inherits the money if you die. This is generally enough money to pay for funeral costs and cover some other expenses like paying off your debts.
If you have federal student loans, those are forgiven by the government in case of death, so don't be lured into purchasing life insurance to cover your student loans as long as they are federal. However, if they are private student loans, then I would make sure you have enough life insurance to cover the balance of your private student loans plus your funeral costs, so that your family isn't saddled with your debt if you pass away.
If you are in your 20s, unmarried, only have federal student loans, and don't have any dependents, I don't believe that you need life insurance. If you own a home with your spouse and you each depend on each other to pay the mortgage, then you may want to take out a 20 or 30 year term life insurance policy equal to the amount of the mortgage so that the other spouse could pay off the mortgage in the event of a death.
If you have kids, you definitely need life insurance. I use the rule of thumb of 7-10 times your salary as a ballpark for the amount of term life insurance you need to purchase. I recommend working with a financial planner to help you figure out the amount that's right for you and your family. Good luck!
Sophia Bera, CFP® is the Founder of Gen Y Planning and has been quoted in The New York Times, Forbes, Business Insider, AOL, The Wall Street Journal, and Money Magazine. She tweets, travels, and loves helping millennials manage their money more effectively. Curious? Sign up for the free Gen Y Planning Newsletter.
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