Whom Is Life Insurance Best For?
Life insurance policies can be straightforward: If you die, the insurance company pays a “death benefit” to whomever you choose to receive it. In addition to paying out a death benefit, some policies can include a savings element, or “cash value,” that’s accessible while you’re alive. But at the end of the day, life insurance is best if you have people whom you want or need to provide for after your death. Approximately 54% of Americans have a life insurance policy, according to LIMRA’s 2020 Insurance Barometer Survey. In general, life insurance is used to:
Pay off outstanding debts Replace lost income Create an inheritance for beneficiaries Help with paying college or other education expenses for children Cover final expenses, including funeral and burial costs Pay death and estate taxes Make charitable contributions Grow tax-deferred savings, or as an investment tool (if you purchase a permanent policy that accumulates cash value)
Should You Buy Life Insurance in Your 20s?
Life insurance is cheaper, the younger and healthier you are. That is because as you age, health problems are more likely to crop up that could increase the cost of coverage or even make you uninsurable. Is that enough reason to get a policy in your 20s? Maybe. If any of the following situations applies to you, getting a policy sooner rather than later is probably a good idea:
You have children or a partner you’d like to provide for financially in a worst-case scenario.You don’t want your family to have to pay for funeral and burial/cremation expenses.You have co-signed debts, such as private student loans or a car loan, that you don’t want your co-signer stuck with if you pass away.You’re maxing out an IRA and your retirement plan at work, and are looking for additional tax-deferred savings opportunities.You expect to need life insurance someday.
How old you are affects how much coverage you can afford—not just because coverage is cheaper, but also because you can probably afford more as you age. If you’ve determined that you need life insurance now, get a policy for a set term of years (typically, 10, 15, 20, or 30 years) and coverage amount you can comfortably afford, even if the coverage amount is less than what you need. Then, when your finances improve, you can get a larger policy that covers the rest.
Factors to Consider When Shopping for Life Insurance
When shopping for coverage, it’s important to consider whether to buy term life or permanent life insurance, or both. Term life insurance covers you for a pre-defined term, such as five to 30 years, and is more affordable, while permanent life insurance covers you for life, and is more expensive. The length of time you need coverage for, the amount of coverage you need, and how much you can afford all factor into your decision about which type of insurance to get. For example, if you want to provide for your family while your children are young and until they complete college, a term policy that lasts for at least that many years could be ideal. If, on the other hand, you wish to provide a sum that covers your funeral expenses, no matter when you pass away, a permanent policy might be more suitable. Or, if you like the investment component of a permanent insurance policy but can’t afford to buy one with the amount of coverage you need, one approach is to purchase a smaller permanent policy and a larger term policy to make up the coverage difference. There’s nothing to stop you from purchasing both a term and a permanent policy to satisfy different insurance needs. Consider whether you have life insurance through your employer when estimating how much coverage you need. Keep in mind that coverage might not be portable and may be more expensive if you leave your job.
Pros and Cons of Buying Life Insurance at a Young Age
Pro: Premiums Are Often Cheaper
Age is one of several factors that affect how much you pay for life insurance. Generally, the younger and healthier you are, the lower your premiums will be. For example, if you’re a 25-year-old nonsmoking male in excellent health, a 30-year term life policy for $500,000 of coverage could cost you $28.23 per month. However, if you’re 40 and also in good health, your premiums could cost $51.17 per month instead. Use an online life insurance premium calculator to estimate your coverage costs.
Pro: Coverage Is Easier to Get
As part of the life insurance underwriting process, you’re often required to complete a paramedical health exam. You’ll also be asked questions about your health status and family history. Since you’re less likely to suffer from serious health issues and, on average, have a longer time left to live (than someone who is older), insurers are more likely to approve your application.
Pro: It Can Create a Legacy
In your 20s or early 30s, you might not have had a chance to build significant assets. Life insurance can replace what you would have accumulated over a lifetime of work and saving so you have something to pass on to your loved ones. You might be “passing on” things to your family that you’d prefer not to—like debt. For example, federal student loans, including parent PLUS loans, can be discharged upon the death of the borrower, but no such protection exists for private student loans.
Con: It’s an Added Expense
Life insurance premiums will always be an added expense, but they can be harder to afford when you’re young. If finances are tight, you need to consider whether you can realistically afford coverage, and if so, how much—and you may need to be content to purchase less than the amount you need.
Con: Returns May Be Better Elsewhere
Though you can make this argument at any age, the younger you are, the more time any money you invest has to grow. This is due to the nature of compounding interest, or that the interest you earn on investments earns interest in turn. The more time you have for these interest-on-interest earnings to grow (compound), the more you can earn. Some suggest that you “buy term and invest the difference,” meaning that instead of purchasing a permanent life insurance policy when you’re young, you purchase a term policy and invest the extra amount you would have spent on permanent coverage. In this way, you can satisfy a life insurance need while also addressing the need to save for retirement. The trick is that you need to actually invest the difference. While investing in the market can yield higher returns, it may also carry more risk, compared to the cash value in a permanent life insurance policy, which typically offers a guaranteed rate of return.
