According to the latest application data, Millenials and Gen Z are increasingly more interested in taking out life insurance policies. It is believed that social media interest in increasing financial literacy is responsible for this drive to take out insurance policies to hedge against the uncertainties of the future. According to Fox Business, applications for life insurance policies in particular increased by 6.5% in December. This is the second-highest year-on-year growth on record for the month. The younger demographics between the ages of 18 and 42 are said to be responsible for this increase. Another commonality that people in this age group share is their reliance on social media outlets as a primary means of digesting and accessing knowledge on financial instruments. The terms and conditions of a policy can be complex and difficult to understand, and they are also generally thought to be too expensive for “normal people” to afford.
The perception of life insurance among millennials
According to a survey published by Insuranks, a popular insurance shopping platform, less than half of millennials (47%) actually have a life insurance policy. This was established through a survey of 1,000 people born between 1981 and 1996. Their responses established that high premiums were the main concern that was preventing people from taking out policies. Given the high costs of living, most people believe that insurance would only strain their financial obligations further. While 66% of survey respondents expressed their concern about the expense, a further 29% cited the complexity of the entire process as the reason preventing them from taking out a policy. Despite these issues, 48% of those without coverage also express their desire to enjoy the sense of security that an insurance policy would provide them. 36% wash their hands off insurance policies altogether, stating that they had no dependents that would face financial hardship, were they to pass on suddenly.
Determining factors for taking out insurance policies
Having dependents that would be put at significant financial risk in the event of an untimely death or disability is the main reason that people take out insurance policies. Leaving their spouse and possibly their children without support is a nightmare for anyone with a family. Life insurance protects you from this risk by covering outstanding debts and even providing an alternative source of income if such an unfortunate event were to occur. One leading reason that millennials even take out policies is because they cover funeral and other death-related expenses. According to the survey results, 50% of all married millennials believe that they would begin to struggle financially within six months of their spouse’s passing—16% say that it would not even take a month. One benefit of hopping on the insurance train early on is that life insurance is significantly cheaper when signed at an earlier age. Age is not the single determining factor in deciding the cost—or the price—of the premium of course, and yet it is an important one, given the extent to which it can impact a person’s general health. Other factors include pre-existing health issues, the amount of coverage required, and self-destructive behaviours such as smoking and alcohol consumption.
Whole-of-life insurance vs term life insurance
There are two main kinds of life insurance that need to be considered when it comes to taking out a policy. Whole-of-life insurance pays out the agreed amount whenever the policyholder passes. Term life insurance policies, on the contrary, pay out the sum if the policyholder does not survive the time period agreed upon. If the policyholder does survive the term, the policy expires without generating any value to them. Whole-of-life insurance is generally the most preferred option in the market due to the surety of payment and yet, obviously, it is also the more expensive kind. It is important to remember in making a decision between the two that whole-of-life plans are not intended to function as a short-term financial instrument. Rather, they act in the long term by functioning as a reserve for your loved ones when you are gone. Term insurance policies are better suited to cover for shorter periods of time, as they provide emergency funds in the case of a premature death. Over-50s policies offer a happy middle ground to those who need it. These policies allow the holder to pay their premiums up until a certain age while allowing the coverage to continue until their passing.
Pros and cons of taking out a policy
Any decision to purchase any type of policy at all should be preceded by a proper consideration of the pros and cons of taking out one. There are a host of benefits to taking out one of course. The main reason is of course the financial protection and peace of mind it provides. This is because it also functions as a replacement for the lost income when a breadwinner for the family passes. In certain cases, an insurance policy can also function as an investment fund. This is because certain policies allow the insurance company to invest the premium payments to generate additional value. The cash value thus generated will then be made available to the policyholder via policy loans and even withdrawals. Life insurance policies are also important sources of income for pensioners, as well as the health benefits that companies add on to the policy. Another not-inconsiderable perk of having an insurance policy as a reserve for the future is the tax advantages it provides. The death benefit of a policy is generally exempt from taxes—the larger the death benefit, the greater the tax benefit.
There are also disadvantages to taking out an insurance policy, whether in respect to life or otherwise. Whole-of-life policy premiums can be a draining monthly expense, especially when the potential for reward is so far in the future—and in a sense, personally inaccessible. Other macroeconomic factors such as the prevailing interest rates will also affect the “price” of an insurance policy in terms of lost investment potential. This is because the money that is tied up in an insurance policy could be saved in an investment option to earn more money on its value instead. These should also be considered in determining whether money is better put away in a policy or an investment portfolio to provide for the future.
(Theruni M. Liyanage)