Improving Financial Literacy: Life Insurance
Monday, March 30 2015 12:00am
By Harry W Greenfield
Glidden Visiting Professor
Partner Buckley King
and special guest
certified financial planner & life insurance agent
YOUR WALLET — In the previous articles, I reported that I read a posting on the web entitled the “5 Financial Mistakes Millennials are Making.” These mistakes are (1) avoiding preparing a budget; (2) misuse of credit cards; (3) not buying a home; (4) saving too little for retirement, and (5) not having life insurance. I have covered four of these items so far. This article will be on renting versus not having life insurance. Since I am not all that versed in life insurance products, I have asked my friend, Jay DeFinis, to ghost write this article for me. Jay is a certified financial planner and life insurance agent. He will cover why it is important for you to think about a life insurance product early in your career.
Remember, INSURANCE insures a financial loss! When reasoning and considering the possibly of life insurance, there are three key risk factor one should address:
1. Benefits and impact personally if one lives a long life
2. Benefits and impact for the beneficiary if one dies too soon
3. Benefits and impact if one becomes disabled (can not work and save money)
Like all insurance products there is a cost. In life insurance, cost is age, health, and sex dependent. Everyone should consider purchasing some life insurance at the youngest age possible — cost is cheaper and time value of money works in your favor. (A dollar on hand today is worth more than a dollar to be received in the future, because the dollar on hand today can be invested to earn interest to yield more than a dollar in the future. The Time Value of Money mathematics quantify the value of a dollar through time.)
Most people consider insurance when they are younger to insure against health risks. People’s health deteriorates. As a result, they have become uninsurable when they need insurance the most to protect their families. Many people want to wait to acquire insurance. Unfortunately, bad things do not wait until you are ready to buy insurance. Once you get an illness, you cannot purchase insurance, or it will become too costly. Working with a financial advisor can help you decide what type and what kind of insurance product is best for you. People will rationalize a decision not to purchase insurance and that can be a bad decision.
Another thing to cononsider is that a male will pay more for life insurance coverage than a female. Currently, females have a longer life expectancy than males (Approx. 10 to 15 years) thus the higher cost for a males. Also of note, tobacco and marijuana usage result in approx. 25 % increase in premium costs! The cost attributable to age factors, illness, and other variables is another reason to purchase when you are young and healthy.
Lastly, most young people never think about the impact of a long term disability that may take them out of the work force permanently or for an unexpected longer time that they anticipated. One should consider adding a disability waiver onto the cost of their life insurance. If one were disabled, the insurance company would continue to pay the premiums, and the policy will build up cash. It is a very cost effective way to insure that one can always save money. Remember if you are not employed, you will no longer contribute to your 401k and IRA savings.
When you are planning for you financial security, managing risk is a key discussion point in these three areas — Cash Flow, Insurance, and Investments. Life insurance is a cornerstone to any successful financial plan! Consider talking with a good professional.