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Should a 29-year-old buy life insurance?

Nov 01, 2010 | | Comments Comments Off

Dear Liz: I’m 29 and growing my assets. I’m contributing 6% to my 401(k), which doesn’t have a match, and maxing out my Roth. I’ve also been investing in shares of my company (which is privately held).

It’s come to my attention that insurance would be a wise idea. (I do have a term policy that needs to be upgraded.) So I met with two different agents, and we discussed a whole life insurance policy and an indexed universal life insurance policy. The whole life insurance had a guaranteed 4% return, while the universal was indexed based on the market. I’ve heard that universal life is typically not recommended, but the agent said this policy was different. Is he blowing smoke? What are your recommendations?

Answer: You didn’t really answer the most important question, which is: Do you really need life insurance?

The mere fact that you now have a few bucks in some retirement accounts isn’t a reason to buy life insurance. The time to buy life insurance is when you have people who are financially dependent on you, such as minor children or a partner who needs your income to pay the mortgage.

If you do actually need life insurance, the primary consideration isn’t term versus cash-value or whole life versus universal life. (As you know, term insurance provides just a death benefit, while cash-value insurance, like the policies you’re considering, combines death benefits with an investment component.)

The primary consideration is: How much do you need? Someone with a couple of children may need coverage equal to five to 10 times his or her annual income. Buying that much cash-value insurance can be prohibitively expensive for many families, because premiums for cash-value insurance can be up to 10 times as much as premiums for a similar amount of term insurance.

If you’re convinced you need life insurance and can afford to buy the appropriate amount of cash-value coverage, then take the competing policies for analysis to a fee-only financial planner — one who has no vested interest in which policy you buy. The planner can point out the costs and potential downsides the agents are unlikely to mention and help you make the right choice.

You also might ask the planner about the wisdom of investing in your own company’s stock. Having both your job and a chunk of your portfolio dependent on one company is considered pretty risky. Your planner is likely to suggest you keep your company stock investments to no more than 5% to 10% of your total investments.

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Categories : Insurance, Q&A