My parents have been pushing me to purchase life insurance. They say that it’s important that I am covered, but it seems like a waste of money to me. Professor Erkis, what do you think? Janine R. ’21.
Whenever anyone asks me a question about insurance, I start by asking them about their situation, as it really depends on the best use of insurance. In my opinion, the best insurance is used to protect against severe financial losses. A few years ago, I wrote a book covering many insurance topics called, “What Insurance Companies Don’t Want You to Know” (available on Amazon). In that book, I ask the following two questions, which should help someone decide if they need life insurance:
- Would anyone experience serious financial hardship if your income was no longer available?
- Would there be an unaffordable cost to your family to replace the services you provide (child care, for example) if you were no longer able to provide those services?
For most college students, the answer to these two questions is no. Therefore, life insurance is not needed as life insurance is to protect others who rely on your income. If you do have someone who relies on your income, then life insurance is very important. I usually suggest purchasing term insurance, as it’s the cheapest way to get the most life insurance.
Since you asked me about insurance, I want to recommend you consider getting disability insurance once you start working. Disability insurance pays if you are sick or injured and cannot work. Most people will be able to financially recover from a short-term illness or injury where they cannot work, but a long-term illness or injury is financially devastating.
The good news is that the likelihood of a younger person being disabled for a long time is quite low. This means the best time to purchase long-term disability insurance is when a person is young. Disability insurance is sold as short-term disability or long-term disability. Short-term disability is usually provided by a person’s employer and covers disabilities up to 90 days. Long-term disability insurance is sometimes provided by a person’s employer. If not, it should be purchased as an individual policy.
Disability insurance can be confusing to purchase. I have an entire chapter in my book about disability insurance so I cannot cover everything about it here. The most important item is the exclusion period. The exclusion period is when the long-term disability insurance starts paying if you are disabled. A 90-day exclusion period starts paying in 90 days to sync up with short-term disability. The longer the exclusion period, the cheaper the price for the long-term disability insurance.
There is nothing wrong with just taking the long-term disability insurance from your employer if they offer it. If they don’t offer it or if you want your own policy, ask for a “clean” quote with no riders or anything else attached. This will help you shop around for the lowest price. At that point, you can consider the additional items.
Anna Lubomirski ’21:
I find Professor Erkis’ advice very helpful. Not being married and not having any dependents means there is no reason to purchase a life insurance policy right now. Unlike life insurance, disability insurance will bring benefits should something happen. The idea that disability policies have premium rates that are locked for life is also beneficial since younger people usually get lower premiums. Therefore, I will make sure I have enough long-term disability coverage when I start working after graduation.