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Life vs. Health Insurance: Which one?

There’s a definite comfort in knowing that even if your health takes an unexpected turn, you and your family have a financial safety net. When money’s tight, though, paying for both a life insurance policy and healthcare coverage each month can get tricky. As expenses start to mount, it can be tempting to drop one or the other to make ends meet.

The reality is that a lot of people genuinely need both types of protection, especially if they have dependents. If that’s the case, the better idea is to limit coverage to what you truly need so you can afford both types of insurance.

Keep in mind that insurance needs can change dramatically during different life stages. What might seem essential for a parent with teen children might not be so important for a recent college graduate or a retiree.

The “Young Invincibles”

Prior to the 2014 rollout of the Affordable Care Act (signed into law in 2010), many 20- and 30-somethings chose to forgo health insurance altogether. And not without reason: These “young invincibles” as some experts call them, have a much lower incidence of health problems than most segments of the population. Paying a premium every month just seemed unnecessary to some.

But with the ACA imposing a mandate on most American to have health coverage, that started to change. In 2018, the penalty for being uninsured is $695 per adult, or 2.5% of earnings, whichever is higher. That has amounted to a pretty strong incentive to sign up.

The Tax Cuts and Jobs Act eliminated the mandate (or, more strictly speaking, the noncompliance penalty), starting in 2019. Still, once you consider the advantages of health care coverage, you might well want to have it.

One piece of good news for recent grads is that the ACA allows you stay on your parent’s plan until the age of 26 or even 29, depending on the plan. That may buy you some time before taking out a policy of your own.

If relying on your mom and/or dad’s policy isn’t an option and you’re under the age of 30, a relatively inexpensive catastrophic policy might be worth a look. You won’t be reimbursed for most doctor visits and other day-to-day health needs, but after you reach a certain deductible, you’ll have a safety net if you end up experiencing a major medical issue. For people with a nearly spotless health record, this minimal amount of insurance is often enough.

Considering a bump-up in your coverage by purchasing a “bronze,” “silver,” “gold” or “platinum” plan on your state’s healthcare exchange? It’s possible that you could get some help from the government. Consumers who earn up to 400% of the federal poverty level – in 2015, that’s $46,680 for individuals and $95,400 for a family of four – qualify for a tax credit. And those who earn less than 250% of the poverty level are eligible for subsidies, which can help offset out-of-pocket medical expenses.

If you happen to live in a state that chose to expand Medicaid as a result of the ACA, you might even be able to get coverage through that program. If you just graduated and are working at the local coffee shop or grocery store to make ends meet, it’s possible that you could qualify.

While you may not have much choice when it comes to obtaining health coverage, life insurance is a different matter. If you don’t have any kids yet, you may not need it.

There are a few exceptions. If you’re financially supporting your parents or grandparents, you’ll want to take out a policy that’s large enough to handle their needs. Or you might want a small policy that will cover your funeral expenses if the unforeseen should occur. As long as you stick with a no-frills term policy, this type of coverage usually isn’t all that expensive for someone in his or her 20s or 30s.

Raising a Family

Once kids come along (or even just a spouse), health insurance takes on a new level of importance. If your employer offers a health plan, that’s typically – though not always – going to be less expensive than shopping on an exchange. At work, the company is usually subsidizing a big part of your health premium; in the “individual” insurance market, you’re paying the full bill, less any tax credits or subsidies for which you may qualify.

But you may not need the most expensive policy your company offers. During your employer’s open enrollment period, take a look at the premium for each plan. Then make a ballpark estimate of how much you’d have to pay out-of-pocket for things like emergency services, lab work and prescription drugs under each option. You may find that the top-tier plan isn’t worth the extra premium.

The same principle applies to families who aren’t covered at work and instead buy on the individual market. Unless you expect to incur major medical expenses, a “silver” plan can sometimes give you enough coverage for less than a “gold” or “platinum” one.

In addition to health coverage, most individuals really do need life insurance once they have a family. But it need not cost you a bundle to give your loved ones a financial safety net. First, consider getting a term policy, which only stays in force for a specific number of years. These tend to be a lot cheaper than permanent policies like whole life and universal life. See Permanent Life Policies: Whole vs. Universal for details.

Another way to keep the cost down is to buy only as much life insurance as you need. There are a couple of ways to figure this out. One is to multiply your salary by a certain amount – 10 times your annual wage is one rule of thumb – and use that to determine the policy’s face value.

A different – and perhaps more useful approach – is to tally up all the expenses your spouse would incur if something happened to you. Think childcare fees, grocery bills, mortgage and car payments, tuition and so on. Then subtract whatever you have in savings and investment accounts. Your policy should cover the difference.

The fact is, any insurance is better than no insurance if you have dependents. So if you’re feeling pinched from a financial standpoint, buy whatever you can afford.

Empty Nesters

It’s one of those pesky facts of life: The older you get, the more likely you are to experience health complications. Thus, middle age probably isn’t the time to start skimping on your medical insurance.

But there’s at least one financial benefit to getting older. Once your kids reach financial independence, you might be able to start dialing back on life insurance. That doesn’t necessarily mean dropping your coverage altogether. If you still have a mortgage to pay off – or if you’re living on a pension that doesn’t pay a survivor benefit – you’ll still want at least some protection.

If your existing term policy is coming to an end, one option is to take out a smaller policy that provides a safety net during your empty nest period. Or if your current term coverage includes a conversion feature, you could turn a portion of it into a permanent life policy.

The advantage of convertibility is that you don’t have to go through medical underwriting all over again, which becomes trickier as you get older and inevitably have more health issues. Just be aware that you only have a certain number of years when you can take advantage of this feature, so it’s worth reviewing your carrier’s terms and conditions.

The Bottom Line

When you only buy the coverage you truly need, paying for health and life insurance simultaneously becomes a lot less daunting. Young and healthy singles may be able to get by without the latter. But For people with dependents, these are two needs you really can’t avoid.