Life insurance for young adults

Many consumers may believe that life insurance is only necessary as they get older. Unfortunately, this means they may forego the advantage of purchasing coverage when they are younger, when premiums are typically lower than when they are older. The best life insurance policy for young adults may be one that provides lifetime coverage that adapts to their changing needs. Life insurance, in addition to providing financial compensation in the event of death, can be an important component of financial planning for young adults and provide an important level of financial security for their family.

What is life insurance for young adults?

Life insurance provides essential financial protections for your loved ones in the event that you pass away, just as car insurance protects your finances in the event of a car accident or homeowners insurance protects your finances in the event of a catastrophic loss to your home from a fire or tornado. Despite the fact that life expectancy in the United States has increased over the centuries, life insurance is designed to cover financial obligations for your dependents or loved ones in the event of an unexpected death. Young adult life insurance provides the same type of coverage as older adult life insurance, but the insured's financial goals may differ depending on your current age. An elderly person may be considering life insurance as a way to leave a lump sum of money to their children, grandchildren, spouse, or partner after they die.

Young adults, on the other hand, may consider term, whole, or universal life insurance policies as a way to start saving for retirement, cover future estate taxes, or guarantee coverage before developing medical conditions that could affect eligibility or rates later in life. If you purchase term life insurance as a young adult and want the coverage to continue after the policy expires, many insurers will allow you to convert your policy to a permanent policy.

Why young adults consider life insurance

Young adults in their twenties and thirties may not consider purchasing life insurance. However, as it turns out, there are a number of potential advantages to purchasing life insurance when you're young. The following points explain why buying life insurance when you are young may be a wise decision.

To lock in affordable premiums

In general, the lower your life insurance premiums will be, the younger and healthier you are. If you buy life insurance when you're young, you can lock in lower premiums, which could save you money as you age or develop health problems. When you buy permanent life insurance when you are young, your cash value portion has more time to accumulate interest and/or investment returns.

To save you from paying higher prices if your health deteriorates

Most life insurance policies require you to pass a medical exam or health evaluation before they will insure you. If you have a pre-existing medical condition, the cost of coverage may be affected or even denied. If you have life insurance coverage, your insurance company cannot usually raise your premium if you develop a health problem. If your family has a history of chronic or genetic illness, obtaining coverage before you develop the condition may be a good way to ensure yourself a lifetime of coverage before it becomes difficult to obtain or too expensive.

To have more time to build cash value

As a long-term financial planning strategy, young adults may benefit from a permanent life insurance policy. Permanent life insurance does not expire after a set period of time, as term insurance does, as long as premiums are paid. Furthermore, permanent life insurance includes an investment component. Your premium is applied to the death benefit amount that you can leave to your beneficiaries and accumulates in a cash value account that you can grow and access throughout your life. As with any savings or investment, the earlier you begin with a permanent life insurance policy, the greater the cash value will grow over time.

Term life insurance vs. whole life insurance

Term and whole life insurance are the two most common types of life insurance. Term life insurance provides coverage for a specific time period, usually 10, 15, 20, or 30 years. Term life insurance is typically much less expensive than permanent life insurance, but coverage is limited to the term length. Those who only need coverage for a limited time, such as when their children are young, may appreciate this restriction. Whole life insurance, on the other hand, does not expire as long as premiums are paid and typically accumulates a cash value account for your use while you are still alive. You might be able to borrow against the cash value or use the accumulated funds. These factors may make a whole life policy appealing to healthy young adults who can typically qualify for the lowest rates.

Frequently asked questions

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

Choosing the best life insurance policy type for you is a personal decision, and it may be easier to choose among the various types of life insurance with the assistance of a financial advisor or licensed life insurance agent. Young adults with time on their side may find it advantageous to be more aggressive with their investing strategy, such as leveraging life insurance, if they are comfortable with the risk-reward ratio.

For example, the cash value of a whole life insurance policy earns nominal interest, similar to a savings account, and may not be ideal for long-term investment potential. Universal life insurance policies allow you to invest the cash value in stocks and mutual funds, potentially yielding a higher return. Equities have a higher potential for growth, but they also carry a higher risk due to market volatility. Choosing an index universal life policy exposes you to moderate risk and allows you to invest in an index, such as the S&P 500, which has historically performed well over 10- to 20-year investment horizons. Discuss your options with a financial advisor or a life insurance agent to determine which option is best for you.

How has the pandemic impacted life insurance sales for young adults?

According to an Insurance Information Institute study, life insurance sales for young adults have skyrocketed since the pandemic began, with a 7.9% year-over-year increase in 2020 and the highest volume on record for digital sales.

Is the death benefit I leave taxable?

In general, the death benefit of a life insurance policy is tax-free to your beneficiary. Beneficiaries are typically exempt from paying taxes on life insurance death benefits received.

Should I purchase life insurance for my child?

Parents may decide to buy life insurance for their children for a variety of reasons. In the event of an unexpected tragedy, purchasing life insurance for your child provides a death benefit to cover funeral expenses or other costs. In other cases, parents are motivated to buy life insurance for their children in order to make them more insurable in the future and potentially lock in low rates for the rest of their lives, especially if the child is disabled or immunocompromised. Ultimately, whether or not you purchase life insurance for your child is a highly personal financial decision with implications for parents to consider.