The financial challenges millennial's face can be overwhelming. Many young adults have to figure out how to pay off college loans, save to buy a home or start a family, and sock away money for retirement. Given these hurdles, it's no wonder that life insurance as a financial asset gets little to no attention. But it should. There are many reasons to have life insurance at a relatively young age, but here are some common ones.
Leaving your debts for others to payAs a young adult, you become more independent and self-sufficient. While you no longer depend on others for your financial well-being, your death might still create a financial hardship for those you leave behind.
You may have debts such as a mortgage or student loans that are jointly held with another person. Or you may be paying your parents for loans they took out (e.g., PLUS loans) to help pay for your education. Your untimely death would leave others responsible for some or all of these debts. You might consider purchasing enough life insurance to cover your financial obligations so others don't have to.
Funeral expenses can also be a burden for those you leave behind. Life insurance could ease the financial burden of paying for your uninsured medical bills (if any) and for costs associated with your funeral and burial.
It's less expensivePremiums for life insurance are based on many factors, including age and health. Certainly, the younger and presumably healthier you are, the less your coverage will cost. This is especially true if you are at a high risk for developing a medical condition later in life.
Replacing lost incomeSomeone may be relying on your income for financial support. For instance, you may be providing for a family member such as a parent, grandparent, or sibling. In each of these instances, how would your income be replaced if you died? The death benefit from life insurance can help replace your income after you're gone.
Providing for your familyAs your family grows, so do your financial responsibilities. There is likely a hefty mortgage to pay. And there are costs associated with young children. If you died without life insurance, how would the mortgage get paid? Could your surviving spouse or partner cover the costs of day care and housekeeping?
And there are events you should plan for now that won't happen until several years in the future. Maybe you'll begin saving for your kids' college education while trying to save as much as you can for your retirement. Over the next several decades, think about how much you could set aside for these expenses. If you are no longer around to make these contributions, life insurance can help fund these future accumulations.
Work coverage may not be enoughYou may have a job with an employer that sponsors group life insurance. Hopefully, you take advantage of that program, but is it enough coverage to meet your needs now and in the future? Your insurance needs may change with time, although your employer's coverage may not. Also, most employer-sponsored life insurance programs are effective only while you remain an employee. If you change jobs or are unable to work due to illness or disability, you may lose your employer's coverage. That's why it's a good idea to consider buying your own life insurance.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
The current generation of military service members have pensions worth millions and they don’t even know it. Many are unaware of how much their monthly retirement check will be and never calculate the total cumulative value of their pension over their expected lifespan. The pension of someone who retires at age 40 after serving 20 years can easily reach $1.5 million by the time they turn 80, while the pension of an officer is often north of $2 million. Combined with other military-related income, such as disability payments from the Veterans Administration, that number can rocket even higher.
Protecting this unexpected retirement wealth can be a challenge, as many who were in the military joined young and did not receive a solid financial education during their years of service.
GETTY IMAGESProtecting this unexpected retirement wealth can be a challenge, as many who were in the military joined young and did not receive a solid financial education during their years of service. New retirees are faced with an unfamiliar patchwork of programs and products, which can lead to many missed opportunities to protect or grow wealth in their post-military years.
Most recently, to the advantage of military spouses, the "Widows Tax" was axed.
If the focus is to maximize income, civilian life insurance is often a more viable option if the veteran’s health allows them to qualify for coverage. While there is still a monthly premium with life insurance, the policy’s beneficiary would have the option to receive their payout as a tax-free lump sum. If this nest egg were invested wisely, it could provide a monthly income for the family left behind, and the bulk of it still be passed to the next generation.
Hispanic military man with his family
GETTY IMAGESSome retirees opt for Veterans Group Life Insurance (VGLI), which does not require a medical screening as long as you apply for coverage within 240 days of your date of separation. However, the monthly premiums dramatically increase with age, to the point of being unaffordable for many. A 50-year-old who has premiums of $144 per month for $400,000 of coverage will see those jump to $920 at age 70. By age 75, the premium has doubled to $1,840 per month. Again, civilian life insurance may provide more affordable options, even if the veteran isn’t in the best of health.
Benefits to veterans separating or retiring from the military are also often underutilized. Most former service members, after years of strenuous physical work or combat, qualify for tax-free VA disability payments, boosting their income for life beyond the value already provided by their pension. For example, a former enlisted member with a lifetime pension value of $1.5 million would see that rise to $2.8 million if declared 100% disabled. A former officer in the same circumstance could see a boost from about $2 million to $3.8 million. Even if a 100% disability rating is not warranted, a disability rating of any percentage will increase their overall income. Although the application process with the VA can be time-consuming and complex, one of the largest hurdles often comes from a different corner. Some veterans find it extremely hard to be forthcoming about the various pains, ailments, and wear and tear on their bodies.
Thrift Savings Plan (TSP) is another wealth-building vehicle that is often not maximized to its full extent by service members. Similar to how a 401(k) would be structured by a civilian employer, employee contributions (plus any match) can be invested in a handful of funds. By default, TSP money is invested in the G Fund, composed entirely of U.S. Treasury securities and that has a 10-year rate of return of 2.30%. TSP participants must deliberately opt into any other fund, something that frequently escapes the notice of young recruits just joining the service. Had those same young servicemembers opted into the C Fund, which attempts to mimic the S&P 500 and has a 10-year rate of return of 13.17%, they might have seen substantially higher growth in their TSP accounts by the time they are ready to retire.
TSP participation also does not interfere with the ability to contribute to a traditional IRA or Roth IRA. Many service members miss out on these opportunities, especially the tax-free growth of Roth IRAs, because they do not realize that TSP is not their only option for retirement savings. Here is where working with a financial professional can be valuable in helping to manage money and make informed decisions, especially a professional who has strong experience in working with veterans.
With millions of dollars of income potential in retirement, how this generation of veterans leverages and uses the opportunity can not only affect them and their loved ones, but if managed wisely, can also enable them to leave a legacy to the next generation.