Getting life insurance is not something 20-somethings typically think about, but many reasons make it worth considering. According to the American Council of Life Insurers, individual life insurance protection in the United States totaled $12.1 trillion at the end of 2018. Life insurance is a financial tool that can help you navigate some of life’s most challenging times.
Keep reading for everything you should know about getting life insurance in your 20s.
Buying Life Insurance in Your 20s
The thing about life insurance is you don’t need it...until you do. There are no guarantees you won’t experience a devastating loss in your 20s. In those instances, life insurance could keep your family from financial ruin by helping to pay for things like burial costs and day-to-day living expenses. Don’t leave your family unprotected by thinking you don’t need life insurance.
The good news is your 20s are the best possible time to buy life insurance. If you are young and healthy without underlying factors that would make you a high risk (obesity, smoking, risky behaviors like scuba diving, etc.), your policy type costs the insurance company less money in claims, so your rates are lower. Insurance companies consider these factors when you are trying to buy health insurance.
Factors to Consider When Shopping for Life Insurance
Financial advisors consider life insurance an essential element of every family’s financial portfolio. Here are some factors to consider when shopping for life insurance.
Number of dependents
The number of dependents you have helps determine the amount of life insurance you need to purchase. If you should die, your family can use the proceeds of your life insurance policy to cover funeral expenses and as replacement income. If you have several dependents, you may need a substantially larger dollar amount of life insurance than a family with only 1 or 2 children. Don’t forget to include your spouse or parents you may care for in your number of dependents.
Life insurers consider pre-existing health conditions when determining the premium you pay for life insurance. Pre-existing conditions increase the likelihood of death thus increasing the insurance company’s risk. If you have too many pre-existing health conditions, you could be denied coverage altogether.
Some of the most common pre-existing conditions that affect life insurance premiums are asthma, heart disease, cancer, high blood pressure, diabetes, obesity and high cholesterol. Having a pre-existing condition typically means that the life insurer assigns you to a higher risk category where you won’t be eligible for the most competitive life insurance rates.
Even though you have some pre-existing health conditions, you may still qualify for life insurance; however, you can expect the premium to be higher than for individuals with no underlying health conditions.
Potential Retirement Income
Ask people approaching retirement age what one of their biggest fears is, and you will hear they are afraid of outliving their retirement savings. One of the best favors you can do yourself is to start preparing for your retirement years when you are in your 20s. Life insurance can be one way to invest in your future retirement income. Whole life insurance has a cash value element that can be used to contribute to retirement savings. One benefit of using your cash value portion of life insurance for retirement savings is that the interest credited back to your life insurance is tax-deferred.
Types of Life Insurance
Consumers can buy two basic categories of life insurance: term life insurance and whole life insurance. Universal life and variable life are variations of whole life insurance.
Here’s a brief explanation of these 4 types of life insurance policies.
- Term Life: Term life insurance covers a specific time frame, most commonly 10-,20-, or 30-year terms. It is a more affordable option than whole life insurance but does not have a cash value option. Some term life insurance policies have the option to convert to whole life policies at the end of the policy term. Term life premiums increase gradually over the life of the policy.
- Whole Life: A whole life insurance policy covers you for your entire life and will pay a death benefit to your survivors regardless of age. The insurance company invests a part of your insurance premium which, in turn, creates a cash value for you to use when you need it. Whole life premiums stay the same over the life of the policy.
- Universal Life: The universal life insurance policy is even more flexible than the traditional whole life policy. The death benefit can potentially be increased upon passing a medical examination. You may also have the option of using your policy’s cash value to make premium payments for a while. The premium can change depending on how you choose to manage your policy.
- Variable Life: Variable life insurance differs from universal life in that you have more options for investing the cash value portion of the policy. You can choose stocks, bonds, or another type of money market or mutual fund account. The potential for investment return is greater, but you also incur greater risk than with the more traditional whole life insurance policy.
Find the Right Policy for You
Life insurance isn’t one size fits all even for people in their 20s. The right life insurance policy for you will depend on your unique life situation. For example, a single person will not have the same needs as a young married couple with children. Everyone’s needs are different. If you are only looking to cover final expenses, a term-life policy could be sufficient. However, if you need replacement income for your family after you die or you need retirement income, one of the whole life insurance options may be better suited for you.
Pros and Cons of Getting Insurance in Your 20s
Hopefully, you will have a long life ahead of you. However, a little preparation goes a long way toward providing peace of mind for yourself and a lasting legacy to the people you love.
Here are some of the pros and cons to keep in mind when considering purchasing life insurance in your 20s.
|Life insurance premiums are lowest in your 20s.|
You can lock in a good insurance rate while you are young and before you develop health conditions.
You have longer to accumulate cash value.
Your cash value policy will provide a nest egg to fall back on in tough financial times.
|If you are on a budget, it might be tough to come up with the life insurance premium payment.|
You may be able to earn a better return on your investment elsewhere if you are looking at life insurance as investment income.
How to Buy Life Insurance
Buying life insurance is not a difficult process, but it does take some planning. The first step is deciding on the type of insurance that best suits your and your family’s needs. Next, you need to find a reputable company and get a life insurance quote. It is a good idea to get several quotes so you can compare rates and find a policy with the best coverage options and most affordable rates.
Once you have your quote, you will need to fill out an application for coverage. You may be required to complete a phone interview and have a physical examination. Once you are approved for coverage, you make your initial payment and receive policy documents to sign and return. You will be given a copy of your policy to keep for your records and you're all set. Depending on your policy, the company may require a waiting period for coverage to begin.
What is Cash Value Life Insurance?
Cash value life insurance is an important and interesting feature of permanent life insurance policies. Many insurance providers refer to cash value as living benefits as opposed to a death benefit.
When you pay your life insurance premium, it is divided three ways; a portion goes to the policy’s death benefit, another portion covers the insurance company’s operating costs and the last is put toward the policy’s cash value.
Permanent life insurance not only pays a death benefit but also allows you to accumulate cash value in the policy. The cash value can be used for any number of things such as paying your insurance premium, medical or college expenses or even retirement income.
Best Term Life Insurance Companies
If you’ve decided you do indeed need to buy life insurance in your 20s, you’ll be looking for a quality life insurance provider. A good life insurance company is one you can rely on to be there when you need it—one that is financially sound, has customizable policy options and offers affordable coverage. Here is a list of some reputable life insurance companies to help you get started.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Life Insurance Protects Your Loved Ones
Life insurance is all about preparing for the unexpected. It makes sense to do everything you can to secure your family’s financial future while you are in your 20s and your rates are lower.
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Frequently Asked Questions
How much life insurance should a 25-year-old have?
The answer depends on the reason for buying life insurance. To cover anticipated final expenses, debts and living expenses, most financial advisors recommend purchasing life insurance for at least 10 times your annual income. A financial advisor or Certified Financial Planner® can help you make the best determination for your unique situation.
What is the maximum amount of life insurance I can get?
Your insurability limit is the amount of life insurance the insurance company will allow you to purchase. You must have financial justification for a large policy. Your policy is designed to replace your wealth should something happen to you, not to increase it. For people younger than 40, the general rule is that you may be insured for up to 25 times your annual income.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.