Think you’re too young for life insurance? Think again. On the contrary, getting life insurance as a young adult can mean affordable annual premiums and more time to build cash value.
It’s also a good idea to buy life insurance in your 20s if you have dependents, large debts or if you want to lock in a good rate.
Keep reading to find out more about when it makes sense to buy life insurance in your 20s.
- Life Insurance in Your 20s
- Should I Buy Life Insurance in My 20s
- When to Get Life Insurance
- Summary of Money’s Should I Get Life Insurance in my 20s
Life Insurance in Your 20s
Many young people find life insurance policies unaffordable. Others believe it unlikely they’ll be approved after the underwriting process, which usually includes a medical exam. As a result, only about 45% of millennials (those between the ages of 27 and 41) have a life insurance policy, according to the life insurance trade association LIMRA.
The reality is that buying life insurance can be a smart financial move, even if you don’t have dependents. And that's especially true for young people.
Should I Buy Life Insurance in my 20s?
You should buy life insurance if you’re a healthy young adult who wants to lock in a low insurance premium with a generous death benefit. Companies offer cheaper life insurance premiums to young people who are in good health and have no preexisting conditions, so waiting to buy a policy at a later point in life means higher premiums and less chance of coverage approval.
- Easier coverage approval
- Lower insurance costs
- Protects your family from having to cover your unsecured or co-signed debt
- Extra monthly expense
- You might get higher earnings from other investments
- A whole life policy will lapse if you fail to pay monthly premiums or pay back the cash value
When to get life insurance
The sooner you get life insurance, the better.
With a life insurance death benefit, you can protect your family's financial future in the event of your untimely death. Life insurance can also help pay off your debt with a co-signer (for a student loan, for example). The tax-free death benefit can cover any unsecured debt such as credit cards, personal loans or student loans you leave behind.
In most cases, life insurance companies offer three ways to disburse the death benefit:
- As a one-time lump sum payout: the full death benefit will be deposited in one payment.
- As installment payments: the death benefit is kept in an account that earns interest and is paid to the beneficiaries in a series of monthly installments.
- As an annuity: the death benefit is invested by the insurance company for the long term on a tax-deferred basis, and it’s paid in monthly installments that are supposed to last for the rest of the beneficiary’s life.
Since term and whole life insurance offer different benefits, it’s important to understand your options before purchasing a policy. Take a look at our term vs. whole life insurance analysis to select the right policy for your needs.
Types of life insurance: term and whole life policies
Both term and whole life policies provide a death benefit to the policyholder’s beneficiaries. However, these policies have their unique benefits and drawbacks.
Term life insurance
- Term life insurance only lasts for an established period, and the death benefit is paid to the beneficiaries after the policyholder’s death
- A term life policy doesn’t have a cash value component
- Insurance companies usually offer terms ranging from 10- to 30-year, with some offering one- to five-year year renewable policies
- When the term ends, the policy lapses and the policyholder is no longer covered
- Term life policies tend to have lower annual premiums than whole life policies, which makes them a good option if you’re looking to buy life insurance for less.
Whole life insurance
- A whole life policy includes a death benefit and a cash value component*
- Whole life policies are permanent, and the policy lapses when the policyholder doesn’t pay the premiums or has obtained a loan that surpasses the cash value
- You can use the cash value to cover premium payments or borrow it (like a loan) for emergencies
- Any outstanding loans taken from the cash value will decrease the policy’s death benefit
- The loans have to be paid back, usually with interest
- Permanent policyholders might receive annual dividends*
*A cash value component is an investment feature of a permanent policy that can earn interest and grow. Remember that the cash value component is a living benefit, and the life insurance company will keep it when you die.
*Dividends are extra funds life insurance companies return to their policyholders at the end of each year.
Buying a term policy in your 20s doesn’t mean you'll be stuck with the same death benefit forever.
Let's say you’re interested in a term life policy but are afraid you'll miss out on the cash value component of a permanent life insurance policy. Once your old policy lapses, many companies like New York Life offer convertible term to whole life policies without further medical exams.
Both whole and term policies offer no-exam life insurance, benefiting those who don’t want to go through the hassle of medical exams. Companies like Ladder offer term policies with laddering, allowing customers to increase or decrease their coverage at any moment based on their financial needs.
Benefits of getting life insurance in your 20s
The main benefit of buying life insurance in your 20s is having access to cheaper premiums and a higher chance at coverage approval.
Additional benefits of buying life insurance in your 20s include:
- Higher cash value earnings that can be used to pay debts, unexpected expenses, or as a down payment for a mortgage loan
- Having your final expenses covered
- It serves as an additional tax-deferred option in addition to a maxed-out IRA or retirement plan
Besides using cash value earnings to cover emergency expenses, policyholders also use life insurance to fund retirement. Some even use life insurance as collateral in small business lending.
Summary of Money’s Should I Get Life Insurance in my 20’s Review
Purchasing life insurance in your 20s is a good option if:
- You want to leave enough money for your family to be financially secure
- You want to leave your final expenses covered
- You want to lock in lower premiums and save money in the long run
Before buying a policy, it’s important to familiarize yourself with the two types of life insurance — "term" and "permanent" (the latter of which includes "whole life") — and to research the different amounts of coverage that are available. Always get a life insurance quote before committing to a policy so you can be sure that the costs align with your budget.