This is a guest post from my friend Eric Rosenberg, a personal finance blogger and podcaster at Personal Profitability in partnership with Mason Finance. He writes about personal finance, credit cards, entrepreneurship, and technology.
When you’re a teen, some topics like insurance don’t seem all that important. But before you know it, things like life insurance will be very important. And if you know the basics of life insurance today, you may be able to save thousands of dollars when you get life insurance as an adult.
Follow along for an introduction to life insurance, how it work, when to get it, and how to save money while ensuring you have the best coverage for your needs.
What is life insurance anyway?
Before we get into the details on how it works, let’s take a look at what life insurance is and how it works. Life insurance is an insurance product (duh) that pays a lump payment if the insured individual passes away while the policy is in effect. In simpler terms, if you have life insurance and you die, it pays a big payment to your family.
While no one likes to think about dying and you probably won’t die for a very long time, there is a possibility you could die younger than expected. Car accidents, illnesses, injuries, and other sad situations happen to people every day. But if you’re dead, why do you care about insurance money?
When you set up your life insurance for the first time, you have an opportunity to choose beneficiaries: people who get a payment from your life insurance if you die. You can update your beneficiaries at any time while the policy is active. Most people choose their spouse, their children, or some combination to receive the payout from a life insurance policy.
The reason to do this is simple. If you have a job and support your family, or are a contributing income in your household, your life insurance can make up for your lost wages. If you used to make $50,000 per year and suddenly that money stops coming in, the life insurance money can help you family avoid hunger, homelessness, and poverty that they might have faced without your support.
The most common and popular type of life insurance is term life insurance, as it gives you the biggest benefit for the lowest monthly cost.
When to get life insurance
Most teens are too young to want or need life insurance, but you should sign up sooner than you probably realize. The reason is because of how life insurance prices work and how your insurance needs are likely to change over time.
Life insurance gets more expensive per month as you get older, but when you lock in a policy the rates stay the same for the life of the policy. That means you can get the exact same policy for a lower price when you are 25 than you can when you are 30.
The exact timing to get life insurance depends on your personal finances and needs. I got a $1 million life insurance policy in my late 20’s as I knew I would be having kids in the next few years. I bought a 30 year term life policy that will stay with me until shortly before my 60th birthday.
Hopefully by that point I have enough saved to self-insure, meaning I would no longer need life insurance at all.
Employer group life insurance versus your own life insurance
When you get your first job after college, you will get a big benefits packet that talks about all sorts of insurance, tax savings, and other perks employers offer to their employees. At large companies, those benefits often include group life insurance.
Group life insurance is a life insurance policy just like term life, but instead of paying for it yourself and keeping it until the term expires, you only get it as long as you have the job. Because most people don’t stay at the same job for their entire career and could end up at a job with no life insurance, it is important to get your own term life insurance policy you can keep no matter where you go.
If you skip getting your own term life insurance and find your life insurance from work is suddenly gone, you may have to pay more for insurance than if you had planned ahead and gotten your own policy when you were younger and healthier.
You might not need life insurance forever
I’m just in my early 30’s, so it is crazy for me to think about having insurance that I will keep until I’m 60. That is sooo far away. What happens if my life changes and I decide at some point I don’t need life insurance anymore? Can I get rid of it or am I stuck paying?
One big benefit of most insurance policies is an ability to cancel them immediately at any time. I can make a phone call and cancel my insurance today. My automatic bills will stop next month and I’ll even get a small prorated refund for the part of the month I paid for but didn’t have insurance.
But there is a better option for life insurance, in some cases, than other insurance. You may be able to sell your life insurance policy to investors and get a big lump payment at that point. It is less than your insurance policy would pay if you passed away, but that is cash you can get at the same time you stop paying for life insurance. It usually works out to be a good deal.
Make smart insurance decisions in high school, college, and beyond
Life insurance is a little ways off, but you have some insurance choices to make starting today. I got my first insurance at 16 years old when I started driving. Then I had renters insurance in college and grad school.
Today, I have life, health, auto, dental, and homeowner insurance. It’s a lot of coverage, but it’s what I need to keep myself and my family safe from those unexpected worst case scenarios. That is what insurance is all about.
This article has been sooo very helpful for me!
So glad! Thank you for letting us know!
I had recently got a part time job, and I wasn’t focusing on the future that much until this post. I’m almost an adult, and this really taught me a lesson that time is fast, and there isn’t such thing as too much preparation. Thanks for the good lesson on insurance
I’m so glad it was helpful to you Tyler! Good to have you! 🙂