Should I Get Life Insurance in My 20s?
Most young Americans rarely think about life insurance, but they should. After all, someone can pass away at any age, and a life insurance death benefit (the payout beneficiaries get when you die) would help cover final expenses and other debts so they don't fall on loved ones.
It can be a mistake to assume that only older couples with children and homes need life insurance. All other factors being equal, it is always significantly less expensive for a younger person to buy insurance than an older person.
Life insurance for a 22-year-old is typically a better proposition than life insurance for a 55-year-old. So, should you get life insurance in your 20s? Read on to find out more and help you decide.
Key Takeaways
- If you're in your 20s, you may not think you need life insurance since you're young and likely to be more healthy, but those factors can actually make it more attractive to buy now.
- Life insurance premiums are cheaper when you buy your policy at a younger age.
- Good health also translates to lower insurance costs and ensures you will still have coverage if you develop a serious illness later in life.
- Life insurance provides a safety net for your loved ones and beneficiaries if you die prematurely and may even accumulate cash value to use while you are still alive.
Reasons to Buy Life Insurance Young
The most obvious reason to buy life insurance is when you have clear insurable interests and want to be financially protected from a catastrophic accident. For example, you may have large debt obligations from student loans or a mortgage that you do not want to be passed on to someone else.
You might also have a spouse or children who rely on your income. These people might depend on insurance payouts to survive if something unfortunate happens to you.
Beyond the death benefit, insurance can have other features that provide more good reasons to buy a policy. Some policies pay out while you're alive if you develop serious medical problems, such as cancer or paralysis. Permanent life insurance policies can serve as tax-advantaged savings vehicles through the life of the policy. Your policy's cash value gives you a way to build savings on top of insurance protection.
Types of Life Insurance
Insurance is typically divided into two categories: term and whole life. However, these categories vastly understate the diversity of insurance products available to consumers, as there are many different kinds of both term and permanent insurance.
Term Life Insurance
Term insurance is designed to cover a specific set of possible events over a defined period. For example, a level-premium term life insurance policy might offer $200,000 worth of coverage over 20 years and cost $20 per month until the end of the term. Let's say a beneficiary is named on the policy who would receive the $200,000 if the insured party dies. A 25-year-old could use this policy to cover final expenses and other debts. Even if you don't need the coverage today, you'll have it set up for the future when you might have a family, a mortgage, and other uses for life insurance.
Some term insurance policies allow a return of premiums, fewer fees, and lower expenses if the insured outlives the policy. However, this coverage tends to be more expensive than level-term policies.
Decreasing term insurance is a useful option to cover a specific kind of financial liability, such as a mortgage. The face value of a decreasing term insurance policy declines over time, paralleling the liability shrinking over time. Even some individuals in their 20s can have insurable liabilities, presenting an argument for a decreasing term policy.
Term policies are always cheaper than permanent policies for the same amount of coverage. This is because they expire at the end of the term and do not accumulate any cash value or living benefits.
Permanent Life Insurance
Unlike term insurance, permanent life insurance offers a death benefit with no expiration date. As long as you keep paying the premiums, your heirs will get the death benefit payment one day. But you need to be able to afford the more expensive premium, which is often hundreds of dollars per month.
Permanent life policies offer the chance to accumulate savings in a cash value account, which works better for people in their 20s than people in their 50s because younger policyholders have much more time to build up the savings.
The different types of permanent life insurance include whole life, universal life (UL), variable life, and indexed universal life (IUL). The differences mostly center around how aggressively the policy's cash value grows. Whole life insurance tends to be the safest and most conservative option, while variable life insurance tends to be the riskiest and most aggressive.
Permanent life insurance policies can be structured so that they are fully paid after a period of 10 or 20 years. Then the coverage remains in effect for your entire life.
Understanding Life Insurance Cash Value
Cash value is an important feature of permanent policies. Many insurance providers refer to cash value as part of a "living benefits" package as opposed to a death benefit. As money is paid in by the insured, a percentage of the premiums is kept in the policy's cash value account and accumulates interest.
This money may be accessed later to pay for other life events such as weddings, home purchases, children's schooling, and even vacations. Most critically, this money grows tax-deferred while in the policy. You can also withdraw or borrow the cash value while alive. If you take out your cash value through a loan, you don't owe income tax on your cash value gains.
Even low-interest whole-life policies can provide a healthy dividend on the cash value. This dividend can be collected or used to increase the cash value. It is conceivable, although not guaranteed, that a permanent life insurance policy could significantly increase retirement income by giving you another source of savings.
Pros and Cons of Getting Permanent Life Insurance in Your 20s
Pros
Lower premiums than getting insurance when you're older
Death benefit coverage for a longer period of your life
More accumulated cash value will be available while you are alive
You may be able to increase coverage later without a new medical exam
Cons
Young adults may have trouble keeping up with premiums
You may have to pay premiums for a longer amount of time
You may not initially need insurance coverage
Premiums payments could have been better used elsewhere
Pros of Buying Insurance in Your 20s
Lower premiums than getting insurance when you're older: When all the other underwriting factors are equal, it is always more expensive for an older person to buy insurance than for a younger person. The statistical odds of dying are lower at younger ages, so insurance companies can charge lower premiums for a 25-year-old than a 55-year-old because their risk of financial loss is less.
Death benefit coverage for a longer period of your life: You'll have life insurance coverage in the event that you die prematurely. If you do not start a family and have heirs, you can use the death benefit to leave a legacy for a charitable or philanthropic cause. Life insurance is also frequently an important component of comprehensive retirement planning.
More accumulated cash value will be available while you are alive: If you begin accumulating cash value in your 20s, the benefits of compounding can mean significant value later in life. A cash value that builds for decades can amount to hundreds of thousands of dollars in future tax-free income. This provides more funds you can access while you are still alive or creates a larger payout for your beneficiaries after you die,
You may be able to increase coverage later without a new medical exam: For many policies, you must undergo a medical examination if you want to increase the amount of your death benefit. However, permanent life policies often allow you to add a guaranteed insurability rider, which lets you increase your coverage periodically without a medical exam. This can be a good choice if, for example, you have a family history of developing a serious medical condition later in life.
Cons of Buying Insurance in Your 20s
Young adults may have trouble keeping up with premiums: Premiums for permanent coverage are substantially higher than those for term life at any age. For young adults just starting careers or families, it may be difficult to maintain those higher payments. Unless premiums are paid consistently, permanent life insurance policies lapse if the cash value gets too low, leaving the policyholder without coverage.
You may have to pay premiums for a longer amount of time: Most policies are designed for premiums to be paid throughout your entire life (or to an advanced age, such as 70). While buying at a younger age means you will pay lower premiums, it also means you must make more years of payments. Some policies offer a limited premium paying period (such as 20 years), although you will also pay higher premiums during that period.
You may not initially need insurance coverage: You might buy insurance at a young age and later reap little benefit. If you stay single and do not care about leaving a financial legacy, you could be spending money on something you don't use.
Premium payments could have been better used elsewhere: There is an opportunity cost involved in paying costly insurance premiums, You could have used that money elsewhere, such as to invest in the stock market and earn a better return. Some policyholders may choose to buy cheap term coverage and invest the difference in the stock market.
Should I Get Life Insurance in My 20s?
If you plan on having a family one day, getting life insurance before you get married can save you money in the long run. This is because insurance premiums are less expensive when you are younger and healthier. Even if you don't plan on having a family, things can change. You may also want to consider insurance if you have any large debts or other outstanding obligations unrelated to family matters.
Are More Young People Buying Life Insurance?
According to MIB Group, an insurance industry services provider, the number of people under age 30 who applied for life insurance in 2022 rose 14.1% during the 12-month period. The growth rate among all older age groups only climbed by single digits during that time. For example, among those aged 31 to 50, life insurance applications rose by 8.6%.
Is It Too Early to Get Life Insurance in My 20s?
It depends. If you are single and do not have a family or are not planning to start one, you may not need life insurance in your 20s. If you think you will do so later in life, obtaining coverage at a younger age can have its advantages.
Is It Better to Get Term Life Insurance or Whole Life Insurance in Your 20s?
It is better to get term life insurance if you have a smaller budget and only need temporary coverage, whereas it is better to get whole life if you can afford higher premiums and want to build savings for the future. Term is much more affordable, especially in your 20s. However, the policy will expire at the end of the term. Whole life lasts your entire life and includes cash value, but is much more expensive. The right choice depends on your insurance goals.
The Bottom Line
Life insurance can make sense in your 20s, especially since you can sign up for very low costs. Both term and permanent policies will be less expensive now versus when you get older. Even if you don't need life insurance today, buying a policy would get you prepared for future insurance goals. Consider speaking with an insurance broker to compare the different types of policies and to decide what role, if any, life insurance should play for this stage of your life.
