Forex Articles

Life insurance. That's something for old, wealthy people, right? Nope. In fact, pretty much every adult should have at least some life insurance – even the young and healthy.

But why would a single 20-something need it? Or a married 20-something, for that matter? The reason is that life insurance isn't something you buy for yourself. It's something you buy for the people you love – your parents, your spouse, your kids (if you have them), even your annoying little brother. It protects the people who depend on your income as well as those who would be stuck paying off your debts if something happened to you.

Yet only 36% of 18-to-29-year-olds have life insurance, according to a study done by Princeton Survey Research Associates International. When asked why they don't have it, most millennials​ said it was too expensive. Wrong again. As a healthy young adult, if you put just $20 a month into a term life insurance policy, your family could receive a $500,000 payout if you were to die.

Given that you probably can afford life insurance, what kind and how much do you need? Here is a brief beginner's guide.

When it comes to life insurance policies, there are basically two types: term life and whole life. (For a closer look at the differences, see Whole or Term Life Insurance: Which Is Better? and Understanding Different Types of Life Insurance.)

Term life policies cover you for a set period of time, usually between five and 30 years. These policies are relatively affordable because they're designed solely for financial protection, kind of like an emergency fund. They're not meant to be a cash accumulation investment.

Why would you only want life insurance for 10, 20 or 30 years? Because, generally speaking, the older you get, the fewer people who rely on your income. That means your need for this type of life insurance decreases with age. Term life is a great option for parents, for example, who want to protect their children until they're old enough to care for themselves financially.

Whole life insurance, also known as permanent life, remains in effect for your entire life, provided you keep paying premiums. However, whole life is much pricier than term. In fact, for the first few years after you purchase a permanent life insurance policy, your premiums will probably be higher than the actual cost of insurance protection. If you want the security of knowing you'll have coverage for the rest of your life and a guarantee that your premiums will never rise, whole life is your best bet.

Some people prefer whole life because these policies accumulate cash value, which means they can be used as investment vehicles. However, compared to other investments such as mutual funds, the growth rate of a cash value life insurance policy is pretty meager. That's why many financial advisors will tell you whole life isn't the smartest investment.

Between whole and term, which type of life insurance makes the most sense for a young healthy millennial? In most cases, a term life policy is sufficient and will serve as an effective financial safety net for anyone who depends on your income. If you die within the next 20 or 30 years, they'll be covered. In the meantime, you also should be building a nest egg through other investments, such as an individual retirement account (IRA), 401(k) or another retirement plan.

The amount of life insurance you should have depends on your current status (single, married, married with children) as well as your debts, living expenses and other factors. (See How Much Life Insurance Should You Carry? and How Much Life Insurance Should I Have? for additional information.) Here's a look at the requirements of each status:

• Single with no children. More than likely, your parents would be the beneficiaries of your policy. If that's the case, you may only need enough life insurance to cover your funeral expenses and outstanding debts. You're basically paying for peace of mind, knowing your parents won't be stuck with your funeral bill, car payment, student loans and other debts if you die. (Mom and Dad will thank you.)

• Married. Now things get a little more complicated. Even if your spouse works, he or she probably depends on your income. Consider how it would affect your spouse financially if that second salary is suddenly lost. In this case, you'll need a much higher death benefit. Not only should you factor in funeral expenses and outstanding debts, but you should also look at your current budget and living expenses. Think about how much time your spouse would need to reestablish a reasonable income. Depending on your situation, that could be three years – or 20.

You should also consider additional expenses your spouse may face if you were to die. Would he or she need to go back to school, for instance, to get a degree? Crunch all these numbers, and you'll come out with the minimum amount of life insurance coverage you need. Then add another 5-10% as an extra cushion, just to be safe.

• Married with kids. You'll need a lot more coverage. Consider all the additional child-related costs your spouse will have to pay from now until your kids leave the nest. That may include childcare, private school tuition, college, even wedding expenses. Again, once you figure out the baseline, add a little extra just to make sure everything is covered.

If you're having trouble finding the time to sit down and add up all these debts and expenses, there is a shortcut calculation. Some experts say the death benefit on your life insurance policy should be approximately seven to 10 times your annual salary. While this may be the quick and easy way to come up with a ballpark estimate, it's not a precise measurement of the amount of coverage you need. Let's say you and your single buddy Joe earn the same salary. But you have a wife, three kids, a hefty mortgage and loads of law-school debt. Obviously, you're going to need a bigger death benefit than your friend needs.

If your employer offers low-cost or free life insurance as a benefit, it's an awesome perk, but it may not give you enough coverage. (See Is Your Employer-Provided Life Insurance Coverage Enough?) Find out what the death benefit is on the policy and determine whether it's enough financial protection for those who depend on your income. You may be able to buy additional coverage at low rates through your employer-provided plan. If not, you may need to purchase a second policy.

You're young, healthy and in the prime of your life. Good for you – but you probably still need life insurance. If you have any outstanding debts, you need life insurance. If you have a spouse or anyone else who depends on your income, you need life insurance. If you have kids, you definitely need life insurance.

With that said, the amount and type of life insurance you need varies depending on your circumstances. If you're not sure where to start, talk to a financial advisor or life insurance agent. These professionals can help you crunch the numbers and figure out just how much and what type of coverage you should get.