Life Insurance: How to Decide if You Need it as a College Student

life-insurance-raftYou’re a college student so life insurance is probably the last thing on your mind.  You’re mostly worried about paying for college, graduating, and dealing with student loans—not about your own death!

But you’re a prime target for life insurance companies, who know that they need to catch your attention while you’re young and in good health, so you can qualify for insurance and pay the premiums for many years to come.

So let’s look at the pros and cons of buying life insurance while you’re a student, or as soon as you graduate.

Who Needs Life Insurance—and Who Doesn’t

The main reason for buying life insurance is to protect someone who is financially dependent on you. If you’re married, and especially if you have young children, life insurance is a must. The payoff to your beneficiary is part of your the long-term commitment to pay a mortgage or provide a college education in your absence.

But if no one is depending on you, there is really no need to buy life insurance now.

You’ll hear arguments that it’s best to buy life insurance while you’re young, healthy and “insurable.” But I’d counter that if you ever become “uninsurable” for health reasons, it’s unlikely that you’ll be starting a family and creating dependents!

And you’ll hear arguments that life insurance is a form of forced savings. That’s true—but out of every premium payment a portion of your dollars will go toward “mortality charges” —the cost of the death benefit.  If you don’t need the death benefit, you would be better off in the long run by putting the entire amount in an Individual Retirement Account (IRA) to grow tax-deferred for your retirement.

And you’ll hear that the buildup of cash inside your life insurance policy can be borrowed out tax-free later in life (although the borrowing does reduce the death benefit).

I’m not against having life insurance. In fact, used appropriately it’s a good “bet.” You know, we are all going to die at some point! Deciding when to buy life insurance is simply a matter of understanding when to place that bet. That means it’s important that you know just a few basics about life insurance.

The Two Kinds of Life Insurance

There are basically two kinds of life insurance—and a lot of variations!

TERM INSURANCE

Term Insurance covers your life a year at a time. The insurance stays in force (active) as long as you pay the premiums (which you can do annually, or even monthly though that is a bit more expensive). You would expect the premium payment to rise every year, because as you get older the chances of your death slightly increase ever year. Insurance companies recognize that you want to plan ahead for budgeting purposes, so they have created level term insurance—meaning that the annual premium will stay the same for a certain period, typically 10, 20, or even 30 years.

Term insurance is usually the least expensive kind of life insurance. That is, you get the most insurance coverage for your annual premium payments, which is very helpful if you have a young family. But once the term of the policy ends, your insurance coverage ends, as well. It’s sort of like leasing a car; at the end of the lease you’ve had use of the car, but don’t have any cash value ownership.

CASH VALUE LIFE INSURANCE

Then there is Cash Value Life Insurance. The insurance industry recognizes that your need for life insurance might last beyond 30 years. Perhaps you will want to leave money to care for your elderly spouse, or to pay estate taxes, or to leave a gift to charity. So the insurance industry has created a variety of “cash value” policies, where a portion of your annual premium goes to savings that build up inside the policy.

There are a variety of ways to build cash inside an insurance policy, as the insurer allows you to make premium payments above the amount to cover your actual insurance needs.

Typically, the insurer pays a fixed rate of interest, or dividends, on the cash buildup. Some cash value policies even allow you to choose among investment sub-accounts, much like mutual funds, inside the policy. Your “cash value” in these policies depends on your investment success. And all that extra money growing inside the policy is tax sheltered.

In fact, one good argument for buying cash value life insurance at a young age is that it gives your money more time to grow, minus the actual insurance mortality charge. But keep in mind that those “illustrations” of investment growth are typically not “promises” and depend on either changing interest rates or investment results.

Critically Important: Your Health

Of course, the insurance company won’t write a policy if you are on your deathbed! But even if you think you are healthy, you might not qualify for the lowest rates. If you smoke, or do drugs, or even if you have high blood pressure or are overweight, you may pay twice as much in premiums for your policy. If you need a good excuse for staying healthy, this is surely the reason!

Even if you don’t need life insurance now, it is very likely that you will be considering a policy at some point in your life. You can be a smart insurance shopper, but the greatest financial impact on your life insurance purchase will come from your own good health habits.

Life Insurance Resources

You can check out the pricing of simple term insurance at many websites. Consider going to www.AccuQuote.com or www.TermQuote.com . You do have to give them some personal information to get a quote, but you are not obligated to buy. And if you’re in good health in your twenties, you’ll be surprised to find out that the cost is far less than a latte a day!

Another good source of trusted information and pricing on all types of life insurance policy is www.TIAA-CREF.org —the website of the top—rated company known for its low cost, non-commissioned sales organization, which has provided retirement and life insurance products to the educational community (and the general public) for decades.

A final word: I’m glad you read this far to learn the basics of life insurance.  Even if you don’t need it now, there’s a good chance that one day you will want to buy a life insurance policy. And like any other product, it pays to be informed. That’s the Savage Truth.

What do you think? Is life insurance neccessary as a college student? Share with us in the comment section below!

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