Starting out in life, you're likely to be cash-strapped, debt-burdened and preferring to rent rather than buy. It's not surprising that Millennials – Americans between the ages of 18 and 31 – might assume that with few possessions and no dependents, insurance premiums are one type of bill you don’t have to pay. If that's where you find yourself, realize that constrained circumstances are precisely what make having insurance so critical.
“Millennials are generally people with lower income and assets, so as a group they are more vulnerable to the bad things that can happen,” says Dr. Steven Weisbart, chief economist of the non-profit Insurance Information Institute. “They have less room to rebound. So what you’re looking for is a financial safety net that, if you have to fall, will catch you before you hit the ground.”
Given that insurance is another item stretching a tight budget – whether you’re paying the premiums or Mom and Dad are footing the bill – certain types of coverage are more appropriate for this stage of life than others. Here are four must-have policies for Millennials – and one maybe:
Health insurance. Given that 42% of Millennials in a recent survey by insurance company The Hartford said that their health was their greatest asset, health insurance tops the priority list. Some twenty-somethings might think of themselves as invulnerable but, notes Weisbart, “The facts are that people get sick and sometimes they get so sick that it costs a lot of money.” You might be covered by your parents’ insurance policy up to age 26, but “people grow out of being 26,” Weisbart points out.
The Affordable Care Act requires all individuals not covered by an employer-sponsored health plan, Medicaid, Medicare or other public insurance programs to sign up for an approved private-insurance policy or pay a penalty of at least $95 in 2014 (the penalty will rise in subsequent years). Individuals whose annual income is less than $45,960 are eligible for a federal subsidy on a sliding scale if they purchase insurance through a health insurance exchange.
It’s not necessary to buy insurance from one of the exchanges. You may be eligible for health coverage through a professional organization or trade group, such as the Freelancers’ Union, a bar association, or a church or alumni association. You can also purchase an individual policy. Online sources that let you compare plans in your area include: eHealthInsurance.com, einsurance.com and GoHealthinsurance.com and Insure.com. If you prefer to have someone else do your homework, the National Association of Health Underwriters website (www.nahu.org) can direct you to a local health insurance agent.
Disability insurance. Millennials’ second greatest asset? According to The Hartford survey, it’s their job or paycheck. Most employers offer short-term paid sick leave, and larger employers usually provide long-term disability coverage of up to 60% of your salary for a certain number of years. But for the many Millennials who work for start-ups, or jump from gig to gig, an individual disability insurance policy is the best way to ensure income if you’re unable to work due to an accident or injury.
Policies – and prices – vary, depending on age, occupation, the amount of replacement income, whether the coverage includes accident or illness or both, the term of coverage, and the length of the elimination period – that time between when the insured person is disabled and when the first check arrives. For Millennials, the annual premium will equal between 1 and 3% of yearly income. As with health insurance, the premiums will be cheaper for those who purchase disability insurance through a professional organization or affiliated group.
Renters’ insurance. Millennials are more likely to rent their home than own it; 72% of householders under age 30 live in rental housing, according to the National Multihousing Council. However, a 2013 Insurance Information Institute poll found that while 96% of homeowners have homeowners’ insurance, only 35% of renters have renters’ insurance.
Renters’ insurance provides financial protection against the loss or destruction of possessions from fire or smoke, vandalism, theft, explosion, windstorm and water damage (not including floods). If the individual is unable to live in his or her apartment, the policy also covers the cost of living in a comparable apartment for a certain amount of time. Because in most cases, renters’ insurance covers only the value of someone's belongings, not the building they’re housed in, the cost is relatively inexpensive: The average annual premium is less than $200.
“Absolutely, positively, purchase renters’ insurance,” says Jeanne Salvatore, a spokesperson for the Insurance Information Institute. “You try to replace your bed, mattress, comforter, sheets, pillow – we’re talking a lot of money here. If you have to re-buy everything, it’s going to cost thousands, even for the most bare-bones apartment.”
Auto insurance. You must purchase auto insurance to drive legally in the United States. All policies include liability insurance, which covers injuries that you or the designated driver cause to someone else.
However, two types of insurance are optional: comprehensive insurance, which reimburses you for loss due to theft or damage caused by something other than a collision with another car or object, such as fire, falling objects, earthquake, windstorm, hail, flood, vandalism, or contact with animals such as birds or deer; and collision, which pays for damage to your car resulting from a collision with another car, object, or as a result of flipping over, and also covers damage caused by potholes.
“If you’re financing a new car, the bank or lending institution will demand that you get comprehensive and collision,” says Salvatore. “If you’re driving an old car, you can consider dropping them.” For example, if the combined optional insurance costs are $800 and the deductible is $1,000 and the car is worth only $2,000 it may not make sense to buy that coverage.
Life insurance. Why do you need life insurance? Because someone is relying on you to provide income or pay off a debt and will suffer a significant loss if you're not around to do it. “If you have no dependents and no debts, then you don’t need life insurance,” says Weisbart.
That would seem to cross life insurance off the list of must-have protections. However, many Millennials are saddled with substantial student loans or significant credit card debt – and that debt doesn’t disappear just because you do. “You should buy life insurance to pay off any debt that at your death becomes someone else’s problem,” Weisbart recommends.
The good news: The younger the person, the cheaper the coverage because it’s highly unlikely that someone young will die. For a 25-year-old female who has not smoked in at least one year, the annual premium for $300,000 worth of coverage over 30 years starts at $250. Check Accuquote for more information.
The Bottom Line
Health insurance and car insurance (if you own a car) are mandatory. Renters' and disability insurance are wise investments. As for life insurance: If you're unencumbered by debts and not supporting anyone else, you can skip it – until that roommate turns into a life partner, anyway.