Life Insurance For Young Adults: What You Need To Know

Life insurance is often associated with milestones such as marriage, parenthood, or starting a business. However, young adults can benefit from securing a life insurance policy early on. Life insurance can provide peace of mind that your loved ones will be financially protected if the unthinkable happens. By purchasing life insurance at a young age, you can lock in lower premiums and build cash value over time. This is especially advantageous if you want to leave a legacy for your family or a charitable cause. Additionally, life insurance can help cover any outstanding debts, such as student loans or mortgages, ensuring your loved ones aren't burdened financially. When considering life insurance, young adults typically choose between term life insurance, which offers coverage for a fixed period, and permanent life insurance, which provides lifelong coverage and often includes a cash value component.

Whole life insurance explained

Whole life insurance is one of the two main types of life insurance, the other being term life insurance. Whole life insurance is a permanent insurance policy that covers the insured person for their entire life, while term life insurance only covers a specific amount of years. Whole life insurance also includes a cash element that the policyholder can borrow from or use to pay the policy's premiums.

Whole life insurance has several sub-categories, including universal life, variable universal life, and flexible or adjustable premium life insurance. It is also known as cash value insurance because of its cash element.

Whole life insurance has a cash value component that functions as a saving and investing vehicle for the policyholder during their lifetime. The cash value grows over time and can be borrowed against or withdrawn. The policyholder can also use the cash value to pay the policy's premiums. The cash value typically earns a fixed rate of interest, and withdrawals are tax-free up to the total amount of premiums paid.

Whole life insurance policies are more expensive than term life insurance policies. The cost of a whole life insurance policy depends on several factors, including age, gender, medical history, smoker status, hobbies, and occupation.

Whole life insurance is often chosen by people who want long-term protection and can afford the high premium rates. This includes parents who want to ensure their children's financial well-being, couples who want to cover living expenses for a surviving spouse, older adults who want to cover funeral costs and supplement their income, and business owners who want to ensure the continued operation of their business after their death.

Universal life insurance

There are three main types of universal life insurance: guaranteed universal, indexed universal, and variable universal.

• Guaranteed universal life insurance offers a guaranteed death benefit and some cash value, but it does not provide the same level of flexibility in terms of premium payments and death benefits as the other types of universal life insurance.
• Indexed universal life insurance offers a death benefit that is linked to the performance of a stock market index, such as the S&P 500. The cash value and death benefit can increase if the index performs well, but there is also a guaranteed minimum return.
• Variable universal life insurance offers the most flexibility in terms of investment choices, allowing policyholders to choose from a range of investment options, including stocks, bonds, and mutual funds. The cash value and death benefit can grow more quickly than with other types of universal life insurance, but there is also a higher risk of loss.

When considering universal life insurance, it is important to keep in mind that the cash value component is subject to fees and charges that can reduce the policy's value. Additionally, the investment performance of the cash value component may not always be as high as expected, and there is a risk of loss.

Term life insurance pros and cons

Term life insurance is a good option for young adults who want to ensure their loved ones are financially protected if the worst happens. Here are some pros and cons of term life insurance to help guide your decision.

Pros of Term Life Insurance

• Cost-effective: Term life insurance is typically more affordable than permanent life insurance, especially for young adults who are healthier and have a lower risk of medical conditions. The premiums are lower because the coverage is only for a set term, usually 10 to 30 years, and there is no investment component.
• Customizable: You can choose the term length that suits your needs, and the coverage amount can be substantial. Some companies even offer terms of 35 to 40 years.
• Renewable and convertible: If you outlive your term, you usually have the option to renew the policy, although the premiums will be higher. Alternatively, you may be able to convert it to permanent coverage.
• Peace of mind: A term life insurance policy can provide peace of mind, knowing that your loved ones will receive a financial benefit if you pass away during the term. This can be especially important if you have dependents or large debts, such as student loans.

Cons of Term Life Insurance

• No investment value: Unlike permanent life insurance, term life insurance does not accumulate cash value over time. There is no investment or savings component, so you don't get anything back if you outlive the policy.
• Coverage ends: If you outlive the term, your coverage ends, and you will not receive any benefits. Permanent life insurance provides coverage for your entire life, as long as premiums are paid.
• Increasing premiums: If you renew a term life insurance policy, the premiums will be recalculated based on your age, resulting in higher costs.
• Medical exam may be required: Some term life insurance policies require a medical exam and a review of your medical history. This can be a more invasive process than obtaining permanent life insurance, which may not always require a medical exam.

When to get life insurance

• Age and Health: The younger and healthier you are, the lower your life insurance premiums will typically be. As you age, your risk of developing health conditions increases, which can result in higher mortality rates and life insurance rates. Therefore, purchasing life insurance at a younger age can help lock in lower rates.
• Dependents: If you have people who depend on your income, such as children, a spouse, or parents, you may want to consider life insurance to provide financial protection for them in the event of your untimely death.
• Debt: If you have significant debt, such as a mortgage, credit card debt, or student loans, life insurance can ensure that your loved ones are not burdened with these debts if something happens to you.
• Life Events: Getting married, starting a family, or buying a home are all life events that may trigger the need for life insurance. You may want to ensure that your family is financially secure if something happens to you.
• Business Ownership: If you own a business, life insurance can provide financial continuity for your business in the event of your unexpected death. It can help cover debts, operational costs, and payroll.
• Peace of Mind: Life insurance can give you added peace of mind, knowing that your loved ones will be financially protected if something happens to you.

It's important to note that the need for life insurance varies from person to person. If you are single, have no dependents, and no significant debt, you may not need life insurance at this time. However, if you anticipate having dependents or taking on debt in the future, purchasing life insurance at a young age can help secure lower rates. Additionally, term life insurance policies are popular among young people due to their affordability.

How to get life insurance

Life insurance is often associated with milestones such as getting married, becoming a parent, or starting a business. However, young adults can benefit from getting life insurance, too. Here are the steps to get life insurance as a young adult:

• Figure out your coverage needs and choose a policy type: Calculate how much coverage you need, taking into account factors such as your income, debts, and dependents' needs. Then, decide on the type of plan that best suits your needs, such as term life, whole life, or universal life insurance.
• Compare life insurance companies and quotes: Research different life insurance companies and compare the policy options they offer. Request quotes from multiple companies to find the most competitive rates.
• Fill out an application: Once you've chosen a policy and a company, fill out the application form and provide any necessary documents. The insurer will then get in touch with you regarding a medical exam, if required.
• Receive coverage: If your application is approved, you can start paying the premiums and have the peace of mind that your loved ones will be financially protected.

It's important to note that life insurance policyholders typically pay the same premiums throughout the life of the policy, so getting insured while you're young and healthy can help you secure lower premiums. Additionally, permanent life insurance policies, such as whole life insurance, can accumulate cash value over time, providing added financial benefits.

Frequently asked questions