Published: May 2015
Q: Permanent life insurance offers "lifelong protection," but if I'm young and healthy, why is that important right now?
A: Whether it's term or permanent, life insurance tends to be less expensive when you're younger, says Juan Valdivieso, an Allstate agency owner in Houston.
But permanent life insurance offers an added benefit to buying when you're young: "With permanent life insurance, you can typically lock in what we call a level premium," Valdivieso says.
With a level premium, you essentially cap the cost of a policy. So, if you lock in the premium when you're young and healthy, you won't have to worry about renewing the policy at a potentially greater cost down the road.
"As long as you pay the premium, a permanent policy will stay in force as you age," Valdivieso says.
Valdivieso notes that while a term life insurance policy typically costs less up front, you may find that it can cost more to renew once it expires (because you're older). And the need for life insurance doesn't end, for example, when your youngest child is done with college — which is how Valdivieso says new parents often think about life insurance.
"They don't always understand that the need for protection is pretty much for the rest of your life," he says. That's why a permanent policy — and the lifelong protection it offers — can be so important.
For instance, if you're married, you may have a spouse who depends on your income stream.
Or, if you're retired and have debts, like a mortgage, your surviving spouse may not be able to afford the payments on a fixed income once you're gone.
Even if you're single, you may not want to leave your debt to an extended family member.
"There's always a reason to continue with life insurance," Valdivieso says.
Where most people have trouble is knowing how much coverage to set in place. "That's always the big question," he says.
To determine the amount of life insurance coverage you need, it's common to turn to a formula that's as basic as calculating 10 times your annual income. So, if you are earning $50,000, you would shop for a $500,000 policy. But Valdivieso says there's a more sophisticated way of determining your optimal coverage.
"You should do a needs analysis, based on your mortgage, the number of children you have (or plan to have), the expenses you can expect to pay at the time your kids enter college, your retirement plans and other expenses," says Valdivieso. "You should look at the whole picture with your agent to determine how much coverage you should apply for."
It's also important that you don't overlook the lifelong savings benefit of a permanent policy.
"You shouldn't just think about life insurance equaling death," says Valdivieso, "because with perm (permanent life insurance), you also have a savings component that grows your money tax-deferred. And that savings can help you pay for a need that may come down the road while you're still living, whether it's college tuition, or for an unforeseen event."
Another big hurdle some young customers have with permanent life insurance is the idea of paying a higher premium than they would for a short-term life insurance policy.
But it's just a matter of thinking about needs and wants, and deciding what's most important, Valdivieso says.
"It can be as simple as forgoing $50 or $60 for that steak and, instead, having a $10 meal and taking the difference to help pay for your premium," he says. After all, "you are your most important asset."