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Do You Need Life Insurance In Your 20s?

Life insurance is a topic that inevitably comes up when you talk to your insurance agent or financial advisor...

Shorter Version


Est. Reading Time: 1 Minute

Life insurance is a topic that inevitably comes up when you talk to your insurance agent or financial advisor. There is no doubting the importance of having life insurance for those who have families that depend on them. But does a single person in their 20s need life insurance? Do you really need to concern yourself with the morbid thoughts of passing already? 

Absolutely! 

It is hard to stress enough how important it is to consider purchasing life insurance as you embark on the road towards your future. 

Why is life insurance important?

Whether you choose a Term or Permanent life insurance policy (there are advantages to both), the goal is to protect your loved ones financially. Whether you name your spouse or parents as beneficiaries, a life insurance policy will cover burial and final expenses and may help replace your income. In the case of a permanent life policy, you can borrow money from the cash value component against the policy. 

There are many reasons to buy a life insurance policy as early age-wise as you can. Cost (premium gets more expensive as you get older), the opportunity to build cash value, and not burdening your grieving family with the final expenses are among the top reasons to make this purchase. 

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Longer Version


Est. Reading Time: 4 Minutes

Life insurance has always been a tough subject to talk about for many people. After all, who wants to think about their passing and plan for that event. It is a morbid thought that your mind instinctively tries to avoid at all costs. However, insurance agents and financial advisors inevitably bring up this subject. It is with good reason that these professionals in their field feel it is essential for everyone to have life insurance. 

When you are in your 20’s you feel invincible. You can’t imagine anything irreversible (like death) ever happening to you any time soon. If you have a spouse or kids, the necessity for life insurance becomes more apparent. However, if you are a single 20-year-old guy or gal, the thought of life insurance seems so… final, not to mention premature. 

We are here to tell you, that those financial advisors and insurance agents are absolutely right. Purchasing life insurance is one of the better financial decisions you can make. 

Why should I get life insurance in my 20s?

The cost

The premium of life insurance is determined based on many factors. One of the deciding factors is your age and health. Remember, life insurance predicts the average life expectancy based on health and age, thus determining how much premium it needs to collect, before paying out the policy. The healthier and younger you are, the lower your premium will be. The key thing to realize is that with most life insurance policies, your monthly premium will remain the same for the length of the policy (10, 20, or 30 years) if the policy is active. It means that as a 50-year-old, you will be paying the same premium you were paying as a healthy 20-year-old. If you were to purchase a life policy at 50, you could be paying ten times as much. 

An insurance company will send a medic to your house who will do a check up and take all your medical stats such as weight, height, draw blood, etc. 

Time to build cash value

If you choose a whole life policy (otherwise called a permanent policy), you can create cash value in it. As a result, you will be able to borrow money against your policy to pay significant expenses such as an unexpected medical bill, downpayment on a house, private school tuition, etc.  

Pay off debts left after your passing

Besides replacing your income, your life insurance can be used to cover burial and final expenses and pay off debts owed by your estate, such as private student loans. These debts and final expenses will be the responsibility of your immediate family members, and life insurance will help offset these costs. 

Two types of life insurance policies

Term Life

You purchase this policy for a particular term such as 10, 20, or 30 years. You will have to undergo a medical evaluation when you buy the policy; however, your premiums will not go up as you grow older, as long as you keep paying your premiums on time, and the policy remains active. Once the term is up, your policy will terminate. If you would like another one, you will have to undergo another medical evaluation and pay the premiums according to your health and age. There is no investment or money-saving component of this policy. 

Advantage: Low cost for young, healthy individuals. 
Disadvantage: If your term is up and you want another life policy it is likely to be very expensive due to age and health. No equity building component to the policy. 

Permanent Life Insurance

The most significant difference between term and permanent life insurance policies is the “cash value” component. As you pay your premiums, a percentage of the premium is invested and is kept in the policy. That money accumulates interest and builds the cash value in your policy. This component of the policy is called “living benefits.” This money can be withdrawn without tax penalties and, as such, is viewed as a useful investment tool that allows your money to grow tax-free. The policy does not have a set term and will continue to be active, and you will continue to accumulate cash value as long as you keep paying your premiums. 

There are a few types of permanent life policy – whole life, universal life, and variable life. 

The difference between the various permanent life policies is how aggressive the investing is and thus how aggressively the money grows. 

The biggest disadvantage of this policy is the cost. For a person in their 20s, the policy can easily cost a few hundred dollars a month. 

Which policy should I choose?

The answer to this question depends on your goals, your financial situation, and the current economy. 

  • What is the current rate of return on investments? Could you purchase a term life insurance and invest the difference between the cost of term vs. permanent?
  • Is building cash value important to you? Can you afford the monthly premium? 
  • Are you looking to incorporate life insurance as a tool in your overall investment strategy?

One common option is to purchase a term life insurance with an opportunity to convert into permanent once you can afford the extra premium. 

According to policy genius, your life insurance premium goes up 8%-10% every year that you wait to purchase. 

Actionable Steps


1

Do your research

When you first start considering life insurance, research your options online to get an idea of possible premiums. While no online quote will give you a finalized insurance premium, they will provide you with an idea of how much you can expect to pay if your medical evaluation provides the same information as your self-assessment. Policy Genius is an aggregator that lets you compare quotes. 

2

Reach out to a financial advisor

To purchase the policy you need to go through an insurance agent (or purchase directly from the insurance carrier). It is beneficial to discuss life insurance with a financial advisor. A financial advisor will look at your current situation and will be able to discuss tax implications and which policy they believe is the most beneficial to you. Many agents who specialize in life insurance products are also licensed as financial advisors.  

3

Review

As the years go by, remember to review your policy once a year. It is crucial to re-evaluate your coverage as your situation changes. The reasons to adjust the coverage could be getting married, having a child, dramatically increasing your income, or buying a house, amongst the others. 

About the Author


Olga Fawcett

Olga Fawcett

Insurance Broker

As a former insurance broker for over 10 years, Olga has deep knowledge of insurance concepts and policies. She is passionate about helping others understand the insurance policies they are purchasing and find policies that suit their unique needs.
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