Did you know that insurance should be the base of all personal financial plans? It is so important and yet often not considered. Why? Probably because it’s complicated and pretty boring! Nonetheless, we should take care of our insurance coverage as a priority. This post is part of the insurance movement; a group of bloggers who are simultaneously pulling out a bunch of insurance articles. I got inspired by a previous post on Fabulously Broke; Net Worth by Age to write about which kind of life insurance coverage you should be getting according to your age.
0-20: Wealth Building
This is definitely the moment where life insurance is useless but cheap as well! This is why it could be interesting to get a base in whole life insurance (the type of insurance that will always be valid). It won’t cost you much and will definitely be a great start for future coverage. I’ve seen many rich families insuring their newborns with whole life insurance. They use this tool to build a higher net worth. Since everybody in the family has a low cost life insurance, the money is being paid to their estate a long time after. Once the wheel is started, wealth can be transferred from one generation to the next.
If you don’t have a plan for wealth creation across generations (this is a pretty boring strategy, I agree!), insurance before your 20s should not really be considered. After all, what’s the point of paying for a 100K insurance policy when you are 15???
21-40: It’s Time!
This is the moment when you are the most vulnerable. Between the age of 21 and 40 you will be contracting several debts (student loans, car loan and ultimately a mortgage) and this is also the time when you may be having children. The two most important reasons to get insured are:
a) Having debts (you don’t want your heirs to deal with your loans, do you?)
b) Having financial dependants (I don’t think you would like to have your children living a miserable life on top of losing their parents!)
The best insurance tool for at this age is definitely a term life insurance policy (I wrote about 5 tricks to get the best term life insurance quotes). Term life insurance is only good for the term of the contract. It can be 10 years, 20 years or 30 years. If you have a mortgage, you should cover the amount with a term life policy. Same thing for kids, they won’t be your financial dependants forever (well… hopefully not!).
During that period, you should have enough life insurance to cover your debts + roughly 7 years worth of income if you have financial dependants. This is a good rule of thumb to use but a complete analysis of your insurance needs is preferable.
41-60: Let the Insurance Expire
At this stage of your life, you should be starting to build wealth. Your budget should be under control and should be able to start saving more aggressively. This is why your insurance needs should be decreasing as well. Let the term life insurance expire and reassess your needs. You might be having a few rental properties or building a company that would trigger a lot of taxes upon selling them. This could be a good reason to look for insurance.
If not, insurance should not be one of your priorities anymore (unless you have unpaid debts!). Be careful with remortgaging your house, the cost of insurance starting at 40 is a lot higher than in your 20s.
60 and over: New Strategies
Over the age of 60, it is not so much life insurance that could be interesting but annuities. This is a product offered by life insurance companies that pay you a defined amount for the rest of your life. It’s like building your own guaranteed pension plan.
We often think that insurance is overpriced when we hit 60. However, a good analysis can show you that sometimes, getting insurance at that age could be worth it. It’s more an investment strategy at that time than anything else!