While in your 20s, life insurance is likely the furthest thing from your mind. After all, most 20-year-olds are probably going to be pretty healthy, and have their entire life ahead of them, so why consider something as morbid as death?
Nonetheless, life insurance is a crucial financial tool that can provide protection for you and your loved ones in case of unforeseen circumstances regardless of one’s age. This is why, in this article, we will delve into why life insurance is significant for individuals in their 20s and the essential things to keep in mind before purchasing a policy.
Why someone in their 20s should consider purchasing a life insurance policy.
There are several reasons why someone in their 20s should consider purchasing a life insurance policy:
- Financial protection for loved ones: Even though someone in their 20s may not have dependents, they may have family members or loved ones who rely on them financially. A life insurance policy can provide financial protection for those individuals in the event of the insured person’s unexpected death.
- Lower premiums: Life insurance premiums are typically based on age and health, and someone in their 20s is likely to have lower premiums compared to someone in their 30s or 40s. By purchasing a policy in their 20s, they may be able to secure a lower premium rate.
- Lock in insurability: Life insurance premiums are also based on health, and someone in their 20s is generally healthier than someone in their 30s or 40s. By purchasing a policy in their 20s, they can lock in their insurability and ensure that they have coverage even if their health changes in the future.
- Student loan debt: Many individuals in their 20s have student loan debt, which can be a burden for family members or loved ones in the event of the insured person’s unexpected death. A life insurance policy can provide financial protection to help pay off those debts.
- Business purposes: Someone in their 20s may also be starting a business or pursuing a career that involves taking on debt or financial obligations. A life insurance policy can provide financial protection for those obligations in the event of the insured person’s unexpected death.
Understanding Life Insurance in Your 20s
First, let’s define what life insurance is. Simply put, life insurance is a contract between you and an insurance company whereby you agree to make payments to an insurance company so that when you die, the insurance company will provide a lump sum payment to your beneficiaries upon your death (provided that the insurance policy is in force).
From there, things can get a bit complicated depending upon what “type” of life insurance policy you choose to purchase so, let’s now take a moment and briefly discuss the two main types you’ll likely encounter.
Term life insurance and whole life insurance
The two main times of life insurance that an average person in their 20s will likely consider are term life and whole life insurance.
Term life insurance:
Term life insurance is a type of life insurance policy that provides coverage for a specific period of time, typically ranging from 5 to 30 years. During this period, if the insured person passes away, their beneficiaries receive a lump sum payout.
- Affordable premiums: Term life insurance policies typically have lower premiums compared to other types of life insurance, making it a more affordable option for individuals or families on a budget.
- Flexibility: Term life insurance policies can be tailored to meet specific needs, such as providing coverage for a certain period of time or a specific amount of money.
- Simplicity: Term life insurance policies are straightforward and easy to understand, with no complicated investment or savings components.
- Peace of mind: Term life insurance provides peace of mind knowing that your loved ones will be financially protected in the event of your unexpected death.
- No cash value: Unlike other types of life insurance policies, term life insurance policies do not accumulate cash value over time.
- Coverage limits: Term life insurance policies may have coverage limits, which means that if the insured person passes away after the coverage period has ended, there is no payout.
- Limited duration: Term life insurance policies are only in effect for a specified period of time, which means that if the insured person outlives the policy, there is no payout.
- Health requirements: Applicants for term life insurance policies are typically required to undergo a health evaluation, and those with pre-existing health conditions may face higher premiums or be denied coverage altogether.
Whole life insurance:
Whole life insurance is a type of permanent life insurance policy that provides coverage for the entire life of the insured person, as long as premiums are paid. In addition to the death benefit, whole life insurance policies also accumulate cash value over time.
- Lifetime coverage: Whole life insurance policies provide lifetime coverage, which means that as long as premiums are paid, the policy remains in effect.
- Cash value accumulation: Whole life insurance policies accumulate cash value over time, which can be used for loans or withdrawals.
- Tax advantages: Whole life insurance policies offer tax advantages, such as tax-deferred growth of cash value and tax-free withdrawals of accumulated cash value.
- Guaranteed death benefit: Whole life insurance policies provide a guaranteed death benefit to beneficiaries, which can provide peace of mind.
- Higher premiums: Whole life insurance policies have higher premiums compared to term life insurance, which can make it more expensive for individuals or families on a budget.
- Limited flexibility: Whole life insurance policies have limited flexibility, with little or no ability to adjust the premium or death benefit amount over time.
- Complex products: Whole life insurance policies can be complex, with features such as cash value accumulation and dividends, which can be difficult to understand.
- Lower returns: The returns on the cash value accumulation in whole life insurance policies may be lower than what could be earned through other investment vehicles.
Advantages of Purchasing Life Insurance in Your 20s
The biggest advantage of purchasing life insurance in your 20s is that you can secure a lower premium rate. Insurance premiums are based on age and health, and younger individuals are generally considered lower risk. By locking in a lower premium rate early in life, you can save a significant amount of money over the life of your policy.
In addition to lower premiums, being young and healthy also means that you are more likely to be insurable and qualify for a higher coverage amount. As you get older, you may develop health conditions that make it more difficult to secure coverage or increase your premiums. By purchasing life insurance early, you can avoid these issues and ensure that you have the right amount of coverage to protect your loved ones.
Another advantage many applicants in their 20s will likely have is their ability to qualify for no-medical exam life insurance policies which will allow them to obtain coverage quickly without having to schedule a medical exam and wait for their results before being approved for coverage.
No medical exam term and whole life insurance
To qualify for a no-medical exam life insurance policy in your 20s, you will need to meet certain criteria. First, you will need to be in good health, as these policies are typically offered to those who are considered low-risk. This means that if you have a pre-existing medical condition, such as diabetes or a heart condition, you may not qualify for a no-medical exam policy.
When applying for a no medical exam life insurance policy, applicants will typically need to answer a series of health-related questions on the application. The insurer will use this information to assess your risk level and determine whether or not to offer you coverage. If you have any pre-existing medical conditions or a family history of certain health issues, this may impact your ability to qualify for coverage or the cost of your premiums.
Life Insurance Rates for Twenty Year Olds
As you can see, life insurance in your 20s is very affordable, even for a 30 year term. And there are a handful of companies that offer 35 and even 40 year term life insurance.
How much life insurance do I need?
The amount of life insurance someone in their 20s should buy depends on their individual circumstances, such as their financial obligations and the needs of their dependents. Here are some factors to consider when determining how much life insurance to purchase:
- Debt: If you have outstanding debt, such as student loans, credit card debt, or a mortgage, you may want to consider purchasing enough life insurance to cover those debts in the event of your unexpected death.
- Dependents: If you have dependents, such as children or a spouse who relies on your income, you may want to purchase enough life insurance to provide for their ongoing living expenses and future needs, such as college tuition or retirement savings.
- Income replacement: If you are the primary breadwinner in your household, you may want to purchase enough life insurance to replace your income for a period of time, such as 5-10 years, to allow your family to adjust to the loss of your income.
- Funeral expenses: Even if you don’t have dependents or outstanding debts, you may want to consider purchasing enough life insurance to cover your funeral expenses, which can be a significant expense for your loved ones.
As a general guideline, experts recommend purchasing life insurance coverage that is equal to 10-12 times your annual income. However, this may not be sufficient for everyone, and it’s important to consider your individual needs when determining how much life insurance to purchase. Additionally, it’s important to review and adjust your life insurance coverage as your circumstances change, such as if you get married, has children, or experience a significant increase in income or debt.
Life insurance calculators can also be a helpful tool to get a general idea about how much coverage should be purchased, however, we always recommend that people only buy as much coverage as they feel comfortable paying for. The last thing that you want to do is purchase an insurance policy that you can’t easily afford.
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Laddering Life insurance policies
While not necessarily a benefit on its own, many individuals who choose to purchase a life insurance policy in their 20s will often find themselves able to take advantage of this fact later on in life should they decide they need more life insurance coverage later on.
In situations like these, individuals can choose to “ladder coverage” over time so that they can obtain the right amount of coverage for the least amount of money. So even though you might not think you need your insurance now, your future self could be thanking you later on.
Laddering life insurance explained:
Laddering life insurance policies can be a smart strategy for those who want to ensure that they have enough coverage to protect their loved ones, while also minimizing the cost of their premiums. Laddering involves purchasing multiple life insurance policies with different coverage amounts and terms so that coverage is tailored to the individual’s changing needs over time.
Here are some of the benefits of laddering life insurance policies:
- Flexibility: Laddering provides flexibility to adjust coverage amounts as your needs change. For example, you may need a higher coverage amount when you first purchase a policy, but as you pay down debt and accumulate savings, you may need less coverage. With laddering, you can adjust your coverage amount by either canceling a policy or reducing its coverage amount, without impacting your overall coverage.
- Cost-effective: Laddering allows you to save money on premiums by purchasing policies with different term lengths and coverage amounts. Short-term policies generally have lower premiums than long-term policies, so by laddering policies with different term lengths, you can save money on premiums while still maintaining the right amount of coverage.
- Easier to qualify: Purchasing multiple smaller policies can be easier to qualify for than a single large policy. This is because insurers may be more willing to offer coverage for smaller policies, and they may require less stringent medical underwriting.
- Diversification: Laddering life insurance policies can help you diversify your coverage and spread out your risk across different policies and insurers. This can provide greater protection against unexpected events, such as an insurer going bankrupt or a policy being cancelled.
- Tax benefits: Laddering can also provide tax benefits, as the death benefit from a life insurance policy is generally tax-free to the beneficiary. By laddering policies, you can structure your coverage to maximize tax-free benefits for your loved ones.
So while purchasing a single life insurance policy in your 20s may not technically qualify as laddering coverage, it will provide an existing policy upon which your “future self” can ladder upon, should the need arise.
Is buying life insurance in your 20s worth it?
At the end of the da, this is a question that someone will need to answer for themselves regardless of how old they are. That said, we here at IBUSA do believe that purchasing life insurance in your 20s can be worth it for many reasons.
However, as with any financial decision, it’s important to weigh the pros and cons before making a purchase. Here are some potential pros and cons to consider when deciding whether or not to purchase life insurance in your 20s:
- Lower premiums: Life insurance premiums are typically lower for younger individuals, as they are generally considered to be lower risk. This means that you may be able to lock in a lower premium rate for the duration of your policy, which can save you money in the long run.
- Financial protection: Life insurance can provide financial protection for your loved ones in the event of your unexpected death. This can provide peace of mind and help you feel more secure about the future.
- Establish good financial habits: Incorporating life insurance into your overall financial plan can help you develop good financial habits early on, which can pay off in the long run.
- Access to more coverage options: Younger individuals may have an easier time qualifying for certain types of life insurance policies, such as policies with high coverage amounts or policies that do not require a medical exam.
- Cost: While life insurance premiums may be lower for younger individuals, they can still represent a significant expense. Depending on your budget and financial priorities, you may not be able to afford a policy that provides the level of coverage you need.
- Limited need for coverage: If you are young and single with no dependents, your need for life insurance coverage may be limited. In this case, it may be more beneficial to focus on other areas of your financial plan, such as building an emergency fund or saving for retirement.
- Opportunity cost: Money spent on life insurance premiums is money that cannot be invested elsewhere. Depending on your financial goals and priorities, there may be other investments that provide a higher return on investment.
- Future changes in health: While you may be healthy and considered low risk now, future changes in health could impact your ability to qualify for life insurance coverage or could result in higher premiums.
The last thing we’ll leave you with before we go is that we’re pretty sure that if life insurance were free, everyone would have a policy. Which must mean that it does have some value. So we would encourage you to find out how much your insurance would cost before you decide whether or not to purchase any.
You could be really surprised by how affordable it is, and simply choose to buy some because, heck why not?