Life insurance for young adults

What is life insurance for young adults?

Much like car or homeowners insurance, life insurance is designed to protect your finances and provide security for you and your loved ones. It offers a payout, known as a death benefit, to beneficiaries upon the policyholder’s passing. Life insurance for young adults can serve various purposes, such as covering financial obligations, leaving a charitable gift or ensuring end-of-life expenses are handled.

Many young adults might not initially consider life insurance, but there are several compelling reasons to think about it early. Here are some key reasons why people get life insurance:

• Financial protection for dependents: Ensuring that your loved ones, such as a spouse or children, are financially secure if something happens to you.
• Debt coverage: Helping to pay off any outstanding debts, like student loans or a mortgage, so that your family isn’t burdened.
• End-of-life expenses: Covering funeral and burial costs, which can be significant, alleviating financial stress for your family.
• Estate planning: Providing funds to cover estate taxes or to ensure a smooth transfer of assets.
• Charitable contributions: Leaving a legacy by making a financial gift to a cause or organization you care about.
• Build cash value: Accumulating accessible funds over time, which can be done with permanent types of life insurance, such as whole or universal life policies. 
• Locking in coverage and rates: Securing life insurance while young and healthy can result in lower premiums and guarantees coverage before any medical conditions might arise.

It’s important to note that if you choose term life insurance as a young adult and want the coverage to continue after the policy ends, many insurers allow you to switch your life insurance coverage to a permanent policy. This conversion can be beneficial as it provides lifelong coverage and builds cash value over time. Additionally, these policies typically allow for conversion without requiring additional medical exams, making it easier to maintain coverage despite any health changes.

Do young adults need life insurance?

Not all young adults need life insurance. However, there are several potential benefits to purchasing life insurance in your 20s and 30s. For some, life insurance can be a strategic part of a broader financial plan, offering various advantages that might not be immediately apparent.

Lock in affordable premiums

Generally, the younger and healthier you are, the lower your life insurance premiums will be. Life insurance for adults usually gets more expensive as you get older, so if you get life insurance when you’re young, you may be able to lock in lower premiums. This could save you from paying higher rates as you age or develop any health issues. If you purchase permanent life insurance when you’re young, your cash value portion will also have more time to accumulate interest.

Avoid paying higher prices if your health deteriorates

Most life insurance policies require you to pass a health evaluation or medical exam before finalizing your eligibility and rate. If you have a pre-existing medical condition, it can affect the cost of coverage or even result in a denial. Once you are locked in with life insurance coverage, your insurance company cannot increase your premium if you develop a health issue. If your family has a chronic or genetic illness history, getting coverage early before you develop the condition may be a good way to guarantee yourself a lifetime of insurance before it becomes difficult to obtain coverage or too expensive.

Have more time to build cash value

Permanent life insurance may be the best life insurance for young adults in some situations. This type of coverage, as the name suggests, is designed to last your lifetime rather than for a set term of years like term life insurance. As long as you continue to pay into the policy, permanent life insurance typically provides coverage up to age 95 to 121, depending on the policy, and thus can play a role in a long-term financial strategy. 

One significant difference between term and permanent policies is that the latter features a cash value component. Many permanent policies include a feature that allows a portion of your premium payments to earn interest. At some point, after value has accrued in that account, you may be able to borrow against it if needed. If you purchased your permanent policy at an early age, there may be considerable value in this account after a while. One factor to keep in mind, however, is that if you do borrow against the cash value, interest will accrue on the loan, and if you fail to pay it back, your death benefit is reduced.

It’s important for young adults to know that permanent life insurance is typically far more expensive than a term policy — sometimes 10 to 15 times more costly. Permanent life insurance is also much more complex.

In many cases, young adults may want to first prioritize paying off high-interest debt and saving for retirement in traditional investment vehicles before looking at cash value life insurance. Life insurance is an insurance product, not an investment product.

What type of life insurance policy is best for young adults?

When you’re in your 20s and 30s, life insurance might not be at the top of your financial priorities. After all, you’re probably more focused on paying off student loans, saving for a down payment on a house or just starting your career. But the reality is that life insurance can be an essential part of a solid financial strategy, especially when you consider the potential benefits for your future.

For most young adults, term life insurance is usually the best option. It’s affordable and provides coverage for a specific period, like 10, 20 or 30 years. This could be perfect for covering significant financial obligations that may only last for a certain number of years, such as paying off a mortgage or ensuring your children’s education is funded if something happens to you. Plus, the premiums are generally lower, making it easier to fit into a young adult’s budget.

On the flip side, other types of life insurance policies, like whole life or universal life, offer lifelong coverage (usually up to 95 - 121 years of age) and a cash value component. While these policies build cash value over time and can serve as an additional financial resource, they are typically more expensive. For young adults, it’s often more practical to focus on building a robust retirement savings plan through other means, such as 401(k)s or IRAs, rather than committing to the higher premiums of a permanent life insurance policy.

However, one advantage of some term policies is the option to convert to a permanent policy later without needing another medical exam. This can be beneficial if your circumstances change or if you develop health issues that could make getting new coverage difficult or more expensive.

Ultimately, the best life insurance policy for you depends on your individual needs and financial goals. If you're unsure, consulting with a financial advisor or a licensed life insurance agent can help you navigate your options and choose the right policy to protect your financial future.

Term life insurance vs. permanent life insurance

When considering life insurance for young people, it's important to understand the differences between term and permanent life insurance. Term life insurance is often selected for its simplicity and affordability, providing coverage for a set period, such as 10, 15, 20 or 30 years. The best term life insurance for young adults may be a policy that allows them to pay off immediate debts, such as school loans, or to protect their young families if they have a partner or children. Once debts are paid off or their children are grown, they may have less need for coverage. Since coverage typically ends after the term is completed, these policies are generally cheaper. They also do not feature a cash value, as permanent forms of insurance do.

Permanent life insurance, in contrast, offers lifelong coverage and includes a cash value component. However, permanent policies can be significantly more expensive than term policies due to the extended coverage and additional features. This category includes several types, each with distinct features:

• Whole life insurance: Features fixed premiums and guaranteed cash value growth, offering predictability and stability.
• Universal life insurance: Offers flexibility in premium payments and death benefits, allowing adjustments to suit changing financial situations.
• Variable life insurance: Enables policyholders to invest the cash value in different accounts, potentially increasing growth but also carrying higher risk.
• Variable universal life insurance: Combines the investment choices of variable life with the premium and death benefit flexibility of universal life.

These forms of permanent life insurance cater to diverse financial needs and goals, making it important for individuals to consider their long-term financial planning when choosing the right type for their circumstances. Speaking with a licensed financial professional may be helpful in choosing the right policy type for your circumstances.

Frequently asked questions