When you're young and single, buying life insurance may not be a priority. You likely don’t have any dependents or other financial obligations that would normally require coverage. Even so, there are plenty of benefits to purchasing insurance in your 20s or 30s.
In this guide, we'll talk about life insurance for young adults. By the end, you'll understand why it's best to purchase a life policy while you're young and how it can help you become more financially secure in the future.
Understanding Life Insurance
Life insurance is a risk management vehicle that pays out a death benefit in case the insured person dies within the coverage period. Policy owners pay the life insurance company every month or every year in exchange for life insurance coverage. These payments (known as premiums) are calculated based on a variety of factors, including one's age.
The benefit, also known as the face value, varies depending on the owner's contract with the insurance company. The insured amount can range from $5,000 to $1,000,000 or more. If you pass away during the coverage period, your beneficiaries are entitled to claim the money.
People often name dependents as their beneficiaries. If you’re a young adult without any dependents, you can name your parents or your spouse. Then, when you start a family, you can update your beneficiaries to include your children. Businesses, charities, and trusts can also be listed as beneficiaries of your policy.
Types Of Life Insurance
Life insurance products can be categorized into two types: permanent and term life insurance. Before purchasing a life insurance policy, it's best to familiarize yourself with the different types to see which one best fits your needs.
Permanent Life Insurance
Permanent life insurance (also known as whole life insurance) stays in force for the insured person's entire life, as long as you continue paying premiums. Young adults are in an especially good position to purchase whole life insurance because the premiums are cheaper when you’re younger.
Here are the most common subcategories of whole life insurance:
Traditional or ordinary whole life insurance: This type of permanent life insurance comes with a set death benefit as well as level premium payments. A whole life policy also has a “savings account” in the form of a cash value component, which grows on a tax-deferred basis.
Universal life insurance: This type of whole life insurance has an adjustable death benefit and premiums.
Variable life insurance: The cash value account can be invested in stocks and bonds. Depending on the performance of your investments, the value of your policy can grow or decrease more quickly.
Variable-universal life insurance: This is the most flexible type of whole life insurance. Policy owners can adjust the premiums and death benefit, while also being able to invest the cash value component in various money markets.
Term Life Insurance
As the name suggests, term life insurance provides life coverage for a set number of years. This can range from 1 year to 30 years. Once the term life insurance policy expires, you'll have the option to renew it, convert it to a whole life policy, or allow it to lapse completely.
While term life insurance is relatively inexpensive, it doesn't have a cash value. Your loved ones also won't be able to claim money from the insurer if you pass away after the term has expired.
Should You Buy Life Insurance In Your 20s Or 30s?
The best reason to purchase insurance while you're young is the lower premiums. Young people have a longer life expectancy and are deemed less risky to insure, so they can get insurance coverage at cheaper rates.
Your young age also makes you eligible for certain types of insurance that are not available for older people. Some policies cannot be bought by people who are 50 years old and above.
Another advantage of getting life insurance coverage while you're young is that you're less likely to have pre-existing medical conditions that make insurance prohibitively expensive. Most life insurance companies require a medical exam for applicants – if they find that you have a chronic illness, they may refuse to insure you or charge you significantly higher rates.
How Much Can You Save By Getting Life Insurance As A Young Adult?
Young adults can save a lot of money when buying insurance. For example, a healthy 25-year-old woman can get a 20-year term policy for $17.91 per month. A 45-year-old woman would have to pay $46 per month for the same policy.
Life insurance premiums also tend to increase by about 8 to 10% each year you delay buying a policy. The bottom line is, the longer you wait, the more expensive insurance becomes.
Reasons To Buy Insurance While You’re A Young Adult
Aside from locking in lower life insurance rates, buying life insurance while you're a young adult comes with the following benefits.
Provide Financial Support
Dependents can use the proceeds from your life policy to replace your income for the next decade, especially if you pass away unexpectedly. Your dependents can include your spouse, partner, or aging parent.
Care For Your Future Family
As a young adult, you may not have children yet. However, getting insurance as early as now can ensure that your future offspring will be financially protected. If you plan on getting married and having a family in the future, getting life insurance should be part of your long-term financial plan.
Pay Off Co-Signed Debt
If you have co-signed debt, such as private student loans, then your co-signer is on the hook for any balance you leave behind. But if you have a life insurance policy, your co-signer can use the proceeds from the policy to pay off your dues.
Start Investing Early
A whole life insurance product can be used to enhance your investment portfolio. Not only can you use the cash value to invest in various stocks, bonds, and market options, but you can also take a loan from the policy. Policy loans can fund your education, a new business, or the downpayment on a new home. Some types of whole life insurance products also pay out dividends, growing your savings even more as you age.
Cover Final Expenses
If you were to pass away unexpectedly, your parents or your spouse would have to shoulder your funeral expenses. According to the National Funeral Directors' Association, the cost of your memorial service can reach up to $9,135 or more. Whole life policies, especially final expense insurance, can be used to cover any end-of-life costs.
FAQs On Life Insurance For Young Adults
Getting insured can be a confusing process, especially for young adults. To help you understand the process better, here are some of the most frequently asked questions on this topic.
What's the best life insurance for a young adult?
Term insurance policies are ideal for young adults who cannot afford to pay hundreds of dollars each month for premiums. However, getting permanent insurance while you're young allows you to take full advantage of its investment component. That's because the money you put into permanent insurance policies will have more time to earn interest, tax-free.
The bottom line is, the best insurance for you depends on your current financial situation and goals. You should consult an agent for more information regarding this matter.
How much insurance coverage do I need?
It's best to get life insurance that can pay off your outstanding debts, plus 10 to 15 times your income. For example, if you have $30,000 outstanding debt and are making $55,000 a year, you should consider getting at least $580,00 worth of coverage.
Ideally, this amount should cover your family's daily expenses for the next decade or so. They can also use it to fund their education or pay for childcare.
If you're unsure how much coverage you need, you can consult your agent first.
What if I can’t afford premiums?
If you find whole life policies too expensive, you can get term policies instead. A healthy 30-year-old man can get a 20-year term life policy for just $18 per month. Meanwhile, a healthy 30-year-old woman can get the same term life policy for $15 per month.
In case these monthly rates are still too steep for you, you can get lower coverage. Then, when your income increases, you can purchase additional coverage later.
Another option is to shorten your coverage term. Most term life insurance for young adults comes with a 30-year term. If the premiums are too expensive, you can get more affordable rates with a 20-year or 10-year term.
As always, don't forget to consult your agent. They'll help you find the best life insurance within your budget.
What other factors affect the rate of my premiums?
When you apply for insurance, you'll undergo what's called the underwriting process. Depending on the type of insurance you choose, the insurer may review your medical history, bank records, and family health history to see if you’re eligible for coverage.
Young adults usually get cheaper premiums because of their age. However, many other factors can impact your premiums. Underwriters also look at gender, occupation, and even your hobbies to calculate your premiums. Smoking and engaging in risky activities like skydiving or bungee jumping can result in higher rates.
How do I find the best life insurance company?
Once you've made the decision to buy insurance, the next step is to find the best life insurance company for your needs. The easiest way to do this is by looking for an independent agent – they can help you assess your situation, compare quotes, and provide information on a variety of policies.
You should also do your own research. Check the National Association of Insurance Commissioners' database to make sure you’re signing with a trustworthy insurer. Learn as much as you can about the company and its financial stability. After all, your beneficiaries won’t be able to file a claim if the insurer goes out of business.
Getting life insurance gets more expensive as you age, so it's best to buy it while you're young. This allows you to get more comprehensive insurance coverage at lower premium rates.
If you need more information about life insurance for young adults, get in touch with Wesley Insurance, LLC. We'll help you choose an insurance product and get the right amount of coverage.