“I don’t need it because I’m young and healthy” is one of the most common myths about life insurance. Life insurance is absolutely appropriate for many young people, even those without dependents to provide for or significant debts to their name.
With relatively low premiums, flexible coverage amounts, and the option to save even more by laddering coverage, term life insurance is particularly attractive to would-be policyholders in their 20s. Twenty-somethings who cross this important item off their to-do lists reap some notable benefits, including lower life insurance premiums on average than older applicants, longer terms at lower cost — again, on average — and protecting surviving relatives from the financial burden of funeral expenses.
Getting life insurance — and getting on with life — is even easier with low-friction digital life insurance agencies like Bestow.
Why You Need Life Insurance in Your 20s
If you’re putting off your life insurance application because you’re not sure you’re old enough to need it, it’s time to reconsider. Consider applying before your 30th birthday and enjoy the likelihood of lower monthly premiums, the flexibility to design a multi-policy ladder that works for you, and the peace of mind that comes with ensuring your loved ones are protected should the unexpected occur — among other benefits.
1. Locking in a Relatively Low Premium
Life insurance premiums vary for a variety of reasons: policyholder age, tobacco use, term length, coverage amount, family health history, and life insurance company underwriting standards. You won’t know your premium for sure until you apply for coverage and complete the underwriting process.
However, it’s no great secret that age is among the most important determinants of life insurance premiums. Imagine two similar applicants: both male non-tobacco users in great health with similar family health histories, applying for the same amount of coverage. The only real difference between the two is their age: one is 25 and the other is 35. The 25-year-old will almost certainly qualify for a lower premium per unit of coverage than his senior.
In other words, it pays to apply for life insurance coverage at a younger age.
2. Lower Risk of Medical Underwriting Issues
Most life insurers require medical underwriting for higher-value policies. That is, applicants must consent to a basic medical exam as a condition of coverage. These exams are thorough but not invasive, and although they sometimes uncover abnormalities that could correlate with underlying health conditions, many applicants pass them with flying colors.
Because health conditions that may reduce life expectancy are less common among younger adults, medical underwriting is less likely to adversely impact 20-something life insurance applicants’ premiums or chances of approval than older applicants’. This is another potent argument in favor of applying early, when you’re least likely to have any major health concerns.
And if you’re not comfortable with medical underwriting for whatever reason? You can skip that part of the process with a no-exam policy. Because they’re riskier for insurers, no-exam policies tend to have lower maximum coverage limits and higher premiums than traditional policies. And applying for no-exam coverage is even easier than applying for traditional coverage — Bestow’s application process is 100% digital.
3. Getting a Longer Term Without Paying More
The likelihood of death is actually quite low for policyholders in the 25- or 30-year-old age band. The difference in life insurance premiums available to these applicants reflects what could happen to them later in life, when their policies remain in effect and their risk of death is much higher.
A term life insurance policy’s term — the timespan during which it remains effective at a fixed premium — is a function of its length. The same policyholder who applies at the same point in time for the same amount of coverage will always pay more for a 30-year term than a 10-year term because they’re much more likely to die while the former policy remains in effect.
This is basic math, but it’s not the whole story. When you apply for longer-term coverage also determines the cost of that coverage. A 30-year policy that begins when you’re age 25 ends when you’re age 55; a 30-year policy that begins at age 35 ends at age 65. Because your risk of death is higher between age 55 and age 65 than between age 45 and age 55, you’ll pay more for the same coverage duration if you wait to apply.
Applying for coverage early also preserves your flexibility to create a multi-policy “ladder” that maximizes coverage when you need it without undue financial burden. A ladder allows you to step down coverage as you accumulate wealth and reduce existing and expected debt obligations.
If you expect your 60th birthday to find you owning your home outright, planning your youngest child’s college graduation, and readying to retire in a few years, you expect to need little if any life insurance coverage in your 61st year. If that’s the year your relatively modest, low-premium, life insurance policy’s 30-year term expires — a decade after a larger 20-year policy and two decades after an even larger 10-year policy — then good on you.
4. Getting More Coverage at a Lower Cost
You might not know for sure at age 22 or 25 how much life insurance you’ll need at age 42 or 45. But you already know that the earlier you apply, the more coverage you’ll get for the same cost. This is important if you expect your future life insurance needs to be substantial.
Getting life insurance early on helps keep your options open too.
5. Covering Debts That Might Survive You
Most debts don’t pass to survivors when you die. That is, if you die before your spouse, they probably won’t be personally obligated to settle your outstanding credit card bills or student loans. (The rules are different for joint accounts, for co-signed debts, and for residents of community property states, so be sure to check with an estate planning expert or financial advisor before making sweeping assumptions.)
This doesn’t mean most of your debts will be forgiven in death. Generally, debts that don’t directly transfer to a surviving heir or co-signer become the responsibility of the deceased person’s estate. They’re settled using the estate’s assets: the contents of checking, savings, and investment accounts, along with cash raised by liquidating other assets like cars or real estate. The greater the value of the debts settled by the estate, the less the estate has left to pass on to heirs.
Adequate life insurance short-circuits this process. That’s because life insurance death benefits, by law, don’t pass through the policyholder’s estate. Those benefits go directly to the life insurance beneficiary — typically a surviving spouse or children.
6. Ensuring Your Survivors Aren’t on the Hook for Final Expenses
If you die without enough in the bank to cover the cost of your funeral and related “final expenses,” your survivors will have to foot the bill. Even a small life insurance policy — one worth perhaps $100,000 — should be more than adequate to keep this from happening. Think of your policy as one last gesture of fiscal respect to those you leave behind.
7. Building Cash Value in a Permanent Life Insurance Policy
For a whole host of reasons, including lower cost and greater flexibility as policyholders move into middle age, term life insurance may be a better fit for 20-something applicants than other types of life insurance.
Young adults shouldn’t completely close the door on permanent life insurance, however. Before applying for coverage, you’ll want to be sure you’re choosing the right life insurance policy for your needs.
That means understanding the differences between term and permanent or whole life insurance — especially the cash value component of a permanent policy, which can grow to considerable size over time and provide a crucial source of low-cost borrowing power for policyholders who don’t own their own homes or who need more borrowing power than a home equity loan or line of credit can provide.
Should You Hold Off on Getting a Life Insurance Policy As a Young Adult?
Life insurance isn’t an absolute necessity for every 20-something. Although the case for getting covered early in your adult life is quite strong, there are two persuasive reasons to wait. Both boil down to: “I’ll know more in a few years.”
Your Future Financial Needs Might Not Yet Be Clear
Many people in their 20s aren’t sure what they’ll be doing in a year, let alone 10 or 20. For many, homeownership remains a financial impossibility, putting yet-to-be-born kids through college an abstraction, and retirement a distant dream. With so much yet to be decided, estimating one’s future life insurance needs is all but impossible.
Under these circumstances, it’s tempting to put the search for life insurance on hold until things come into focus. But that strategy might not be the best most, even for would-be policyholders who genuinely have no idea where they’ll be five years down the road.
A better move: getting a toehold in the life insurance market with a modest 30-year policy that sets you up for whatever lies ahead without breaking the bank. If you’re too busy for a medical exam, remember Bestow — at age 22 or 25 or 28, a no-exam policy won’t be exorbitant.
You May Still Need Life Insurance After Your Term Ends
You’ll probably be wealthier and less debt-burdened in 30 years, but there’s a decent chance you’ll still have obligations ahead: college tuition, an outstanding mortgage balance, dependents who don’t yet support themselves financially. You might have new obligations you can’t imagine right now, like a spouse who’s unable to work due to a debilitating medical condition.
The bottom line is, you might still need life insurance after the initial term ends on the policy or policies you took out in your 20s. Does that mean you should wait five or 10 years to apply for your first policy? Not necessarily.
Financially speaking, you may be better served by establishing the first rung on your life insurance ladder now with a low-value, low-premium, 30-year policy, and then adding more coverage when you’re a bit older but still relatively young.
The case for getting life insurance in your 20s is stronger than you might think. Locking in low rates early, maximizing the flexibility of your multi-policy ladders, ensuring that your current and future heirs and survivors are protected before life gets in the way — these are just some of the many reasons to apply sooner rather than later.
Term life insurance isn’t the only financial product you’ll need to get a head start on building and sustaining lifelong wealth, of course. Even before applying for your first life insurance policy, make it a top priority to lay out a comprehensive financial plan and begin building an emergency savings fund capable of sustaining you through at least six months of financial hardship.
As every life insurance policyholder knows, the unexpected can happen at any time. But fortune, as they say, favors the prepared.