Buy Term, Young Man

Life-insurance companies are going after a new generation of prospective policyholders. But by pitching expensive policies, they could potentially hurt the financial prospects of young adults for decades to come.

A recent Investment News column noted that whole life insurance is enjoying a resurgence of popularity, especially among people in their 30s. According to one industry insider, families need insurance that will last throughout their lives. As a form of permanent insurance, whole life is usually set up to provide lifelong benefits, in contrast to term policies that are usually designed to be in force for only a limited period of time.  

Setting priorities
The problem is that life insurance is just one aspect of a good financial plan. For instance, young adults with children should not overlook disability coverage. As a practicing financial planner, I'm astounded by the insufficient liability coverage many young families carry. Furthermore, once the children are grown and gone, one's need for life insurance is often reduced.

In addition, because whole life premiums are so high, they can keep young families from doing other important things, such as funding retirement plans and saving for children's education. Less expensive term policies leave more resources available for other needs, such as funding a 529 savings plan.

Rather than taking out a whole life policy, most 30-somethings would be better suited to lock in rates with a 20-year level premium term policy. When you reach your 50s, consider reducing your coverage amount and perhaps using a shorter 10- or 15-year term. If you don't think your insurance needs will fall in 20 years, you can get a 30-year level term policy right away.

It's not that buying a whole life policy is such a terrible idea. However, other areas such as retirement funding, college savings, and other more pressing insurance needs also need to be addressed. By taking up so much of a young family's budget, whole life doesn't give most families the balanced financial plan they need.

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