I’m embarrassed to share this, but when I was in my early 20s I had no idea why people got life insurance.
Then, when I got my first job at 24 and was told that part of my benefits package included life insurance, I still didn’t really know what it was for. Probably because at the time I was young, broke and didn’t have anyone who depended on me.
Looks like I wasn’t alone, since a recent TD survey found that 55% of millennials don’t have life insurance, and unsurprisingly tend to put it at the bottom of their financial to-do list after paying down debt and saving up to buy a home.
Now that I’m 31, married, with way more assets and responsibilities than at 24, I shake my head at how naive I was. Yes, the key elements of having a strong financial plan for yourself are having a budget, tracking your spending and net worth, building up your emergency fund and investing for your future…but those aren’t the only elements.
Another important element is having life insurance, and I’m going to walk you through why you need to get it if you don’t already have it.
What Is Life Insurance Anyway?
In short, life insurance is simply a means to protect anyone in your life from financial losses that could result from your death. Typically, those people would include your partner/spouse or children, but they could also be your parents if they depend on you financially, your business partner or anyone else who depends on you for their livelihood.
So even though I didn’t have anyone depending on me financially at 24, it was still a good thing that I had life insurance from my work because it could’ve come in handy if I did pass away and my parents were stuck with my funeral bill (which could cost on average $5,000!).
To be more specific, what life insurance can do if you die is pay off some or all of your debts (ie. your mortgage or student loans), pay for estate and death taxes, and provide an income for your partner or family who depend on your salary to maintain their quality of life.
Do You Actually Need Life Insurance?
Okay, now you know what life insurance is for, but you may be thinking “Aren’t I too young for something like this?” Well, glad you asked because there are actually some great benefits to getting life insurance when you’re young.
You see, when you buy a life insurance policy for yourself, you’re required to pay a premium each month to maintain its validity. One of the factors in determining your premium is your age. The younger you are, the lower the probability of you dying, which in turn means you’ll pay a lower premium each month. The older you get, the probability of you dying increases and so does your premium. In short, if you buy a life insurance policy early on in life, you’ll be paying less than if you were to wait til you were older.
But, do you actually need it? Well, if you don’t have any dependents or debts, if you already have some money saved up to pay for your funeral costs, or if you’ve already got coverage through work…maybe not. I say maybe not, because it really depends on your particular situation. But if you have already started a family (or are planning to) or have dependents, then the answer is “Heck yes, you need it!” The purpose of life insurance is to protect your loved ones, so make sure you make this your priority this year.
To speak to having life insurance through your work a bit more, it’s a great benefit having it, but there are two things to be aware of.
First, once you leave that employer, you’ll no longer be covered by that life insurance policy. So, if you’ll be jumping ship to a new company, remember that most employers don’t open up benefits to new employees until their probationary period is over, so there may be a period where you’re not covered whatsoever.
Second, your coverage through your employer may not be enough. Typically, employers offer coverage that is one or two times your salary. Depending on how much you earn, this may not be enough to cover expenses and debts you leave behind. In that case, it would make sense to get life insurance on your own to make up for whatever your employer’s life insurance can’t cover.
How Much Coverage Is Enough?
Here comes some math, so I hope you’ve got your calculator out. To ensure you’re not paying too high a premium, you need to get the right amount of coverage (and not more than that). The way to figure out how much you need is simple.
First, you can do it the easy way and try out TD’s Right Fit Coverage Assessment tool, which was developed to help Canadians figure out how much coverage they need and what goes into that calculation. It’ll take you a few minutes, then it’ll let you know how much coverage you should get.
Second, you can do it the old-school way and use the income replacement method. This method assumes that your dependents will need 70% of your salary for the next 7 years to stay afloat after your death.
The calculation looks like:
(Your income x 7) x 0.70 = Your insurance coverage requirement
($70,000 x 7) x 0.70 = $343,000
So, What’s the Best Way to Get It?
Since I’m all about getting the right coverage for the best price, I highly recommend you do your research to know all of your options and even speak to an insurance advisor or broker to make sure you’re fully informed about what insurance is right for your particular situation.
And just in case you’re wondering about pricing, premiums generally cost less than a cup of coffee a day over a 10-year period (so way less than you probably thought). As a personal example of what I currently pay for my life insurance, my premiums cost $35/month for a $500,000 20-year term life policy.
It took me hardly any time to get a quote that fit within my budget, and now I can sleep soundly at night knowing that if something happens, I’m covered.
Do you have life insurance? When and why did you decide to get it?