Why Young Professionals Need Life Insurance - YouTube

I’m worth more dead than alive.

This was a statement by my boyfriend when we were looking at our net worth and estate

spreadsheet.

The reason for this conclusion was that our respective net worth’s increased if we passed

away and our group life insurance plans paid out.

But is that really true?

I’ll answer that in today’s episode and talk about what Life Insurance is, and why

and when it’s important.

I’m Susan Daley and this is Your Money, Your Choices.

As I mentioned in my video outlining disability insurance, the purpose of insurance is to

protect the risk against a loss.

You pay an insurance company a regular premium (typically every month), and when an event

you’re insuring against happens, the insurance company will pay you the agreed amount.

Like disability insurance, life insurance protects your human capital.

Human capital is simply a fancy term for the current lump sum value of your future income

stream.

If you were 30 years-old in Canada and earned the average income of $43,700, ignoring raises

and inflation, your human capital would be $1.5 million.

While that’s not normally included in your net worth statement, it’s still an asset,

and a preeetty big one.

So my boyfriend’s statement about being worth more dead than alive wasn’t true.

He was off by just a little bit.

Now if you were a single hermit, would it really matter if your income stream stopped

when you passed away?

No.

No one else is counting on any of that income, and you’d be dead so wouldn’t need it

either.

But most people aren’t hermits so there is potentially a need for life insurance.

If you’re single and not a hermit, you might still need some insurance.

Think about the various costs that might crop up if you were to pass away.

Would your family have to pay for your funeral out of pocket?

Or perhaps your parents have co-signed a loan with you and if you passed away they’d be

on the hook for paying it back.

If you don’t have enough assets to cover those potential expenses, life insurance is

an option.

The easy scenario when life insurance is needed is if you have family depending on your income.

Let’s say you have a mortgage, a spouse and 2 kids and bring home half of the family

income.

If you passed away without protecting any of your human capital (future income), things

would probably be pretty tough for your spouse and kids.

How would your family pay for the mortgage, food, daycare, education and/or retirement

savings, let alone all the other expenses associated with life and raising a family.

So unless you’re billionaires, you’ll need some life insurance to cover your butt.

I doubt any billionaires are watching my YouTube channel, but if you are hi!

If you’re the sole breadwinner, life insurance is a must.

Those were some pretty easy examples to understand when life insurance is and isn’t needed.

But let’s say you’re staying home with your 2 kids and your spouse brings home all

the income.

That doesn’t necessarily mean you don’t need any insurance.

Raising children is a job, whether you’re getting paid or not.

If you passed away, would your spouse have additional expenses associated with taking

care of the family, like daycare, cleaning services, managing the household finances,

etc.

Life insurance can provide funding to help with those costs so your family’s standard

of living doesn’t decrease with your passing.

The key is to understand what happens financially if you or your spouse dies.

What income would stop?

What expenses might increase, and for how long?

Understanding those numbers helps you get an understanding of how much life insurance

is needed.

It might be scary and uncomfortable to talk about death, but it’s absolutely necessary

to ensure you understand what would happen to those you love and depend on you if you

were to die.

The goal is to have your loved ones be able to sustain their standard of living without

having to make bit sacrifices.

So how does life insurance work in practice?

Once you determine how much life insurance you need (I’ll dive deeper into this in

a future video), you will take out a life insurance policy for that amount of death

benefit (in other words, the amount that will be paid to your beneficiaries if/when you

do pass away.

You pay a regular premium, monthly or yearly, for this coverage.

Life insurance companies are able to pool risk.

Not everyone who pays for life insurance coverage die during the policy.

Insurance companies can use mortality tables to estimate your risk of dying and price the

premiums accordingly.

Since young people have a lower chance of dying in any given year (i.e. a lower risk

for the insurance company to have to pay the death benefit), their premiums are typically

lower.

The premiums paid are all pooled together and used to pay out the beneficiaries of those

individuals that do die.

There are lots of different options when it comes to life insurance, which will be my

topic for next time.

I'm Susan Daley and this has been Your Money, Your Choices.

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