Do Young Lawyers Need Life Insurance?
Executive Summary
Life insurance can be a valuable part of a young lawyer’s financial life. While useful for some lawyers, other lawyers may not need it now or ever. To better understand if life insurance is right for you, it is best to educate yourself regarding life insurance. Life insurance can broadly be broken up into two types of policies: Term and Permanent. Lawyers may need life insurance for different purposes, but generally young lawyers need life insurance when they have people depending on them for income. Determining how much your death benefit should be involves considering many factors including cost of premiums, future expenses of dependents, debts outstanding, and other factors. Once a young lawyer determines they need life insurance, there are various ways to purchase it. It can be through your company, an insurance company, online, or an insurance broker or agent. Purchasing life insurance is an uncomfortable financial decisions, but it can provide your dependents and heirs with the financial support they need if you unexpectedly pass away.
It is nearly impossible for young lawyers to avoid hearing about life insurance. Organizations like the ABA offer their lawyers the opportunity to buy life insurance through their group plan. Many law firm benefit packages contain some form of life insurance. Some salesmen sell life insurance to young lawyers.
Life insurance is not a product for young lawyers to avoid. When purchased for the right reasons, it can be a tool to protect your wealth and your heirs. Most young lawyers will need life insurance at some point in their financial life. The considerations young lawyers need to be aware of before buying include:
- Understanding what life insurance is
- Knowing why a young lawyer may need life insurance
- Explaining the differences between the types of life insurance
- How to buy a life insurance policy for yourself if you need it
I write this blog post as a fee-only financial planner. I intentionally do not accept commissions or fees on life insurance purchases. Avoiding financial incentives allows me to advise my clients with as few of conflicts of interest as possible. I am writing this blog post to inform and educate young lawyers on the pros and cons of life insurance, not to sell you something or advise you to purchase it.
What is Life insurance?
Life insurance is an insurance policy that offers a payout if you die while the policy is in force. Since you have passed away when the policy pays out, you will never receive the benefit of a life insurance policy on yourself. Therefore, life insurance is not about you. It is about the people around you.
If you were to pass away with a life insurance policy, your listed beneficiary typically receives the payment tax-free. If Laura the Lawyer has a $1M life insurance policy and dies, $1M will go to her beneficiary(s). So life insurance is an insurance product that gives financial compensation to someone who would be adversely affected if you were to die prematurely.
If you are a young lawyer who does not have anyone who relies on your current and future income (kids, other dependents, spouse, etc.), then there may not be a significant need for a life insurance policy. There will be exceptions, but generally, without someone relying on your income, a life insurance policy does not offer a material benefit compared to the costs of the policy.
What Are the Types of Life Insurance?
In general, two main categories of life insurance exist: Term and Permanent. Within each of these types are various life insurance products.
Permanent Life Insurance
Permanent life insurance is life insurance that will stay in effect for the rest of your life as long as you continue to make your insurance payments. These monthly payments to maintain your insurance policy are called premiums. You likely pay premiums for other insurances like auto insurance and renters/homeowners insurance.
Permanent life policies come in many different titles like:
Whole life insurance
Universal life insurance
Variable life insurance
Indexed universal life insurance
There are many different names for permanent insurance, but almost all will have whole, universal, or variable in their name.
Young lawyers will rarely need a permanent life insurance policy. There are a few reasons why. First, most people do not need a permanent life insurance policy. For young lawyers without dependents, there may not be a need to have life insurance. Similarly, when people previously dependent on you become independent, you no longer need a death benefit to support them.
Second, a feature for permanent life insurance allows holders to accumulate cash value in a tax-deferred way. Cash value accumulation is a way to save in a tax-advantaged way while protecting your loved ones. The problem with this feature is that it attempts to combine building wealth and protecting wealth in the same product.
Insurance, in principle, follows the made whole doctrine. Legally, that means to pay or award damages to put the party back into a position where they were before the insurable event. If the purpose of insurance is to offset losses, it cannot also help you grow.
Investing involves risk. If you want to invest and grow your wealth, you must accept some risk of loss. Taking risk in exchange for potential growth does not mean you need to be as risky as possible to grow your wealth quickly. There is a threshold where the increased risk does not lead to increased growth. It also means that there is no free ticket to building wealth. If someone offers you a chance to build wealth and protect yourself from any downside risk, you will have to pay for that protection. For permanent life insurance, the cost is either lower growth, higher premiums, or both.
Young lawyers are in the wealth accumulation phase of their financial life where they want to grow their wealth, not pay a lot to protect it. When lawyers have so much time to benefit from compounding growth, overpaying for unnecessary insurance can severely limit their future net worth.
So what is a more affordable life insurance option that offers adequate protection but without limiting future growth nearly as much? Term Insurance.
Term Life Insurance
Term Life Insurance is a far simpler insurance product. It consists of 3 components: a death benefit, a premium, and a fixed amount of time for coverage. It cannot accumulate a cash value in a tax-deferred way because it does not need to. Young lawyers already have access to tax-deferred investment accounts like a 401(k), IRA, HSA, and 529 plans. Term insurance protects your loved ones if you pass away without the additional costs and features of permanent life insurance.
The main difference between permanent and term life insurance is the length of coverage. Unlike permanent life insurance, term life insurance is only for a certain number of years. For young lawyers, this means you can get term life insurance when you need it, and it will expire when you no longer need it. These terms can last for 10, 15, 20, 30, and sometimes 40 years.
The death benefit of term insurance is just like the death benefit of a permanent life insurance policy. It pays out the death benefit amount to your beneficiary(s) when you pass away. If you have a $1.5M death benefit, both a permanent and term life insurance policy will pay that amount.
Term life insurance premiums are often much less than permanent life insurance. Some estimates have found monthly premiums are 5-15 times less for term insurance than permanent life insurance. One reason for this significant cost difference is permanent life insurance always pays the death benefit as long as insurees continue to make premium payments because eventually everyone dies. Since term life insurance expires at the end of the coverage term, the insurance company may not have to pay the death benefit. Example: A young lawyer buys a 30-year term life insurance policy with a death benefit that covers their mortgage amount and will pay for their kids to graduate college. After 30 years, the lawyer is still alive. The insurance policy expires, the lawyer no longer has dependents to financially support, and the insurance company never had to pay the death benefit.
Since there is the uncertainty of an insurance payout with term insurance compared to the certainty of permanent insurance, insurance companies can issue term policies with lower monthly premiums. The savings and the simplicity of term insurance can give lawyers an adequate death benefit for their beneficiary(s). Lawyers can also apply those savings on monthly premiums towards their investment and retirement goals.
When Do Young Lawyers Need Life Insurance?
Lawyers can purchase life insurance at any time. The need for life insurance varies because every young lawyer has a different financial life. When determining if life insurance is right for you, it is best to speak with a fee-only financial advisor vs. other advisors (insurance salesman, fee-based advisors, and commission-based advisors). The reason is that fee-only advisors do not accept commissions or fees generated from selling life insurance to their clients. Analyzing insurance options without a financial incentive allows the recommendation to be freer of conflicts of interest than advisors with an incentive to recommend life insurance. While it is always best to speak with a financial professional before purchasing life insurance, there are a few general situations when young lawyers should consider buying term life insurance:
When you have kids
When one spouse relies on the other for household income
When you have a large debt
If you are a partner in a firm
Kids
Kids are expensive. Even if your kids are 14-17, it is unlikely that they can earn enough to support themselves financially. For lawyers who want their kids to go to college, that is an additional expense that many parents want to provide for their children.
If you tragically pass away when your kids are still dependent on your income, it can be a significant financial burden on the other parent or their new guardian. Life insurance can provide a financial safety net for your kids. No amount of money can replace you in their lives, but it can provide them with the future financial security that every parent wants for their children.
Households with one income
Lawyer households have the financial opportunity to provide for an entire family with only one income. Lawyers are fortunate to work in an industry that highly rewards their skills and knowledge. A high income allows some lawyer households to have one spouse work full-time while the other parent maintains the home and takes care of the children.
If the spouse responsible for earning the income to support the household suddenly passes away, it can add a financial burden to the grief of the surviving parent and the kids. Therefore, it can be beneficial for young lawyers to consider a life insurance policy that covers their future financial support for the household and the spouse.
Large Debt
The average mortgage in early 2022 was around $450,000. A mortgage is a substantial debt that can become a financial burden for someone else if you die unexpectedly. Young lawyers may purchase a term life insurance policy where the term matches the length of the mortgage repayment (30yr Term life insurance with a 30yr mortgage), and a death benefit equals the mortgage amount. Doing so would leave their heirs with enough money to pay off the mortgage and own the home outright.
Some insurers will offer decreasing term life insurance where the death benefit decreases over the policy term as the mortgage amount declines. The decreasing term life insurance premiums are usually cheaper than term life insurance with a fixed death benefit.
Partner at a Firm
For a law partnership, the partners are owners. When a partner passes away, the heirs often cannot assume the role of the deceased attorney, but the heirs will still own that portion of the partnership. So partners will take out life insurance on each other to buy out the partnership interest of the heirs. The heirs receive the money they need, and the remaining partners can maintain full ownership. The agreement to buy their partnership interest is typically through a buy-sell agreement or stock redemption plan among the partners.
How Much Life Insurance Do I Need?
Determining an appropriate death benefit amount is not an exact science. Young lawyers should consider many different factors. One limitation maybe your budget. If you are limited in how much you can afford to spend on life insurance, this may limit the death benefit amount you can have in a policy. Lawyers should note that a higher death benefit will result in a higher premium. Some other methods to determine a death benefit include using rule of thumb estimates like:
Ten times your annual income
Multiply your salary by the number of years until retirement
Adding together the costs to repay your debts, replace your income, and fund your kid's education
Multiply your current annual expenses by 20
Each rule of thumb will result in a different death benefit amount. Compare these rules of thumb along with their expected premium amounts and how comfortable you feel about each of the calculated death benefit amounts. You may decide to select one of these amounts, an average of all of them, or some amount in between that you feel good about.
You might need to take out two life insurance policies (one for each spouse) if you are married with dependents. It may be uncomfortable to assign different death benefit values to each spouse depending on their financial needs and ability to provide as the surviving spouse, but it is worth having the conversation to put these policies in place. You would rather have this discussion now and protect your loved one than avoid the conversation and leave your heirs with nothing if you pass away unexpectedly.
There is no single correct answer on how much life insurance to buy. Young lawyers should consider all options before choosing the amount they feel most comfortable with leaving to their heirs. Speak with a fee-only financial advisor to help you determine an amount that makes sense given your financial situation.
Where Can I Buy Life Insurance?
Young lawyers can purchase life insurance through various life insurance providers. Since there are many different providers, it is always best practice to gather multiple life insurance quotes before choosing one. Young lawyers can find quotes through:
Directly from a life insurance company
Through a life insurance broker or agent
Through an online provider
Through your employer's benefits
Depending on the policy, you may have to have an in-person physical exam from a doctor or provide your medical records for the insurance provider to review.
Keep in mind that life insurance through your employer may be convenient, but if the policy is not portable, you will lose this policy if you leave your firm. Since premiums for term insurance increase as you age, it can lead to a more expensive policy later in your career if you decide to leave.
Final Takeaways
Life insurance can be necessary for young lawyers. Before purchasing a policy, young lawyers should fully understand:
- what life insurance options are available
- which policies are better from a cost and coverage perspective
- when to get life insurance
- how much life insurance to have
- where to buy life insurance
It is unlikely that any friends, family, or coworkers have a financial situation that mirrors yours. It is best to work with a fee-only financial professional when considering if life insurance is in your best interest.
Life insurance is just one of many insurance policies considered as part of the insurance component of the Developing Financial Process. As a fee-only financial planning firm, I do not accept commissions or kickbacks for insurance products. Insurance has its place in a financial plan, but insurance alone is not a financial plan. If you want to learn more about life insurance and how it fits your financial situation, I would be happy to speak with you. It is difficult for young lawyers to talk about this topic without receiving a sales pitch, and I want to avoid that. My first of two free meetings, the Meet & Confer, is a 30min meeting where we can talk about life insurance and other financial concerns and goals you have. There is no sales pitch in this meeting, just an honest conversation about money. Schedule a Meet & Confer today to see how financial planning can help you!
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.