Personal finance

Millennials aren’t thinking about this risk to their finances

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If you’re in your 20s or 30s without children, the need to purchase life insurance can seem unnecessary.

Putting it off, however, may cost you.

“The better health you’re in and the younger you are, the cheaper your insurance premium typically will be,” said certified financial planner Douglas Boneparth, founder and president of Bone Fide Wealth in New York.

Insurance premiums rise by an average of 8% to 10% for each year you postpone buying coverage, according to Policygenius, an online insurance marketplace.

If you’re planning to have kids, there may be even more of a reason to buy it now.

That’s because health complications related to pregnancy, including gestational diabetes, could affect the premiums you pay, said Logan Sachon, an insurance expert at Policygenius.

Your insurer may even postpone your application until after you give birth.

Marriage is a good time to purchase life insurance, too.

“It’s not hard to see how precarious of a financial situation it can be if one spouse’s income is turned completely off,” Boneparth said.

Finally, if you have a cosigner on your student loan, you’ll want to purchase life insurance.

While federal student loans are discharged at the borrower’s death, banks offering private student loans will turn to the cosigner to repay the debt.

Some people with student debt will get life insurance so as not to leave their cosigners — often their parents — in a bad place, Sachon said.

Here are a few things to consider when purchasing life insurance.

Determine the best type and amount

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First, you should understand what type of insurance is best for your situation.

Permanent life insurance offers coverage for the remainder of your life as long as you pay the premiums. These policies come with a cash value account that accumulates on a tax-deferred basis.

Permanent coverage is usually a tool for more sophisticated strategies, including special needs trusts, so-called key-man coverage for business owners and estate planning.

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Term life insurance offers coverage for a set period of time, which can be as long as 30 years. It doesn’t have a cash value component, which makes it cheaper and simpler than permanent life insurance.

Term is likely the best option if you’re young and only want to replace your income.

“It’s affordable,” Boneparth said, of term life insurance. “You can buy more of it for a cheaper price.”

Policygenius recommends using a formula to determine how much life insurance you need: resources (income and liquid assets) minus financial obligations (expenses and debt).

A rule of thumb is to aim for a death benefit that’s equal to 10 to 12 times your income.

Shop around

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Multiple factors determine the cost of your policy.

“Underwriters are doing complicated math to determine how likely [it is] you will make a claim, ” Sachon said. “Any diagnosis you have — physical or mental — can affect your rates.”

She said underwriters tend to take the last five years of your health history into account, but there are exceptions.

For example, if you had asthma as a child and are now a smoker, that could hike up your rates.

People in certain careers might also end up with higher rates or they may be denied coverage altogether, Sachon said.

Independent brokers can take all these details into account and connect you with companies that can give you the best rates.

Don’t wait

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A lot of people will hear that weight, high blood pressure or smoking can affect your rates and decide to hold off purchasing their insurance.

“They think ‘I’ll get healthier, then I’ll apply,'” Sachon said.

Another reason not to wait is that you want to have the policy in place before you need it.

That’s because a new diagnosis might make you uninsurable in the future.

“You’re not buying it for now,” Sachon said. “You’re buying it for in 10 to 15 years when you have a diagnosis and you need to know your family is protected.”

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