Life Insurance: A Smart Investment For Your 20S

Life insurance is probably the last thing on your mind when you're in your 20s. You're likely focused on your career, managing daily expenses, and navigating adulthood. However, there are several compelling reasons why getting life insurance early can be beneficial. Firstly, it's cheaper to buy life insurance when you're young and healthy, as premiums tend to increase with age. Secondly, life insurance can provide peace of mind by ensuring your loved ones are financially protected in the event of your premature death. It can cover final expenses, such as funeral costs, and any outstanding debts, including student loans or mortgages, so they don't become a burden for your family. Additionally, some life insurance policies offer tax advantages and opportunities to accumulate cash value, which can be used for various purposes, like purchasing a home or supplementing retirement income. While it may seem unnecessary, life insurance in your 20s can be a smart financial decision, offering lower premiums and a safety net for your future.

Lock in lower premiums while you're young and healthy

Life insurance is probably the last thing on your mind when you're in your 20s. You're likely focused on your career, managing your expenses, and navigating the responsibilities of adulthood. However, locking in lower premiums while you're young and healthy is a compelling reason to consider purchasing life insurance early. Here's why:

Health and Insurability

Your health plays a significant role in determining your life insurance premiums. When you're young and healthy, you are considered a lower risk by insurance companies, which translates to lower insurance costs. By purchasing life insurance in your 20s, you can take advantage of your good health and lock in those lower rates. As Matthew Carbray, a CFP® professional, noted, one of the most overlooked benefits of buying insurance early is "the ability to lock in your future insurability." As we age, our health may decline, and we may develop conditions such as high cholesterol, Type 2 diabetes, high blood pressure, or obesity, which can increase our insurance rates or even make us uninsurable. By acting now, you can protect yourself from these potential health-related premium increases in the future.

Peace of Mind for You and Your Loved Ones

Life insurance provides peace of mind for both you and your loved ones. Knowing that your loved ones will have financial support in the event of your untimely death is invaluable. It ensures that your family's living expenses and debts are covered, and they won't have to bear the burden of any unsecured or co-signed debt you may have. Additionally, life insurance can cover funeral costs and other final expenses, sparing your loved ones from additional financial stress during an already difficult time.

Long-Term Savings

Permanent life insurance policies, also known as whole life insurance, offer a savings component called the cash value. This cash value grows over time as you continue to pay your premiums. By starting a whole life insurance policy in your 20s, you give this cash value more time to accumulate, potentially resulting in a substantial sum by the time you reach retirement age. This money can then be used to supplement your retirement income or help with significant purchases, such as buying a home. Additionally, some policies allow you to borrow against the cash value for emergencies or investment opportunities.

Cost Savings

Life insurance premiums tend to increase as you age. By purchasing a policy in your 20s, you can lock in lower rates for the long term. For example, a 21-year-old non-smoking female in excellent health can secure a 20-year term policy with a $100,000 death benefit for about $110 per year. If she waits until she's 40, the same policy would cost her almost $150 per year. The difference becomes even more pronounced with permanent life insurance policies. The same 21-year-old can get a whole life policy with a $100,000 death benefit for $1,106 per year, while a 40-year-old would pay $2,405 per year for the same coverage. Buying life insurance in your 20s allows you to take advantage of these cost savings and protect your finances in the long run.

Protect your family from unsecured or co-signed debt

Life insurance is a crucial tool to protect your family from unsecured or co-signed debt. Here's how it can help:

Protecting Your Family from Unsecured Debt

Unsecured debt refers to loans that are not backed by collateral, such as credit cards, medical bills, or personal loans. These types of debt pose a higher risk to lenders, as they are not protected by a guarantor or specific assets in the case of the borrower's inability to pay. As a result, unsecured loans typically carry higher interest rates. If an individual passes away with unsecured debt, their assets may be seized or sold to repay the debt.

Life insurance can provide a safety net in such situations. The death benefit payout from a life insurance policy can be used to cover these outstanding debts, ensuring your family members are not burdened. It can help protect your loved ones from inheriting your debt and shield your assets from being liquidated to cover these obligations.

Protecting Your Family from Co-Signed Debt

Co-signed debt is a common occurrence, especially with private student loans. When an individual co-signs a loan, they are legally responsible for the debt if the primary borrower becomes unable to pay or passes away. In the event of the borrower's death, the co-signer may be left shouldering the remaining debt.

Life insurance can offer protection in such cases. By taking out a policy on the primary borrower's life, the co-signer can ensure that the loan will be repaid, even if the borrower passes away. This safeguard can be particularly important for parents who co-sign their children's student loans or spouses who co-sign each other's loans.

Additional Considerations

When considering life insurance to protect your family from unsecured or co-signed debt, it's important to weigh your options carefully:

• Term life insurance provides coverage for a specific period, such as 20 or 30 years, and is generally more affordable, especially for young and healthy individuals.
• Whole life insurance offers coverage for an individual's entire life and often includes a cash value component, but it tends to be more expensive.
• Permanent life insurance provides lifelong coverage and allows for the accumulation of savings in a cash value account, though it comes with higher premiums.

Additionally, it's essential to assess your financial situation and future goals. If you plan to start a family, get married, or anticipate having significant debts, obtaining life insurance in your 20s can be advantageous due to lower premiums. However, if you're single, childless, and debt-free, you may not need life insurance at this stage.

Cover final expenses, e.g. funeral costs

While it may seem unnecessary to get life insurance in your 20s, it can be a smart financial move. One of the benefits of getting life insurance at a young age is that it can cover your final expenses, such as funeral costs, so that your loved ones don't have to.

The average funeral costs $7,848, according to the National Funeral Directors Association. While you may not need to worry about your funeral for years, life insurance can provide peace of mind and ensure your loved ones aren't burdened with unexpected costs. Final expense life insurance can cover these costs, and since it's cheaper to buy life insurance when you're young, it's a good idea to lock in a low rate now.

In addition to covering funeral costs, life insurance can also protect your loved ones from other financial burdens that may arise after your passing. For example, if you have private student loans or other unsecured debt, your cosigner or estate may be responsible for paying them off. Life insurance can ensure that these debts are not passed on to your family.

Another benefit of getting life insurance in your 20s is that it can protect your future insurability. As you get older, you may develop health issues that could make it more difficult and expensive to get insurance. By purchasing life insurance now, you can lock in lower rates and ensure you have coverage in the future.

Overall, getting life insurance in your 20s can provide financial peace of mind for you and your loved ones, ensuring that final expenses and other debts are covered in the event of your untimely death.

Start building a cash value to pass on to the next generation

Life insurance is probably the last thing on your mind when you're in your 20s. You might be focused on your career, managing your expenses, and dealing with the responsibilities of adulthood. However, there are some compelling reasons to consider purchasing life insurance early. One of the most significant advantages is the ability to build a cash value that can be passed on to the next generation.

Permanent life insurance policies, such as whole life insurance, offer a death benefit and allow you to accumulate cash value over time. This cash value grows on a tax-deferred basis, providing you with a valuable investment-like savings account. The earlier you start, the more time your cash value has to grow, potentially resulting in hundreds of thousands of dollars in future tax-free income.

For example, consider a 21-year-old who purchases a whole life policy with a death benefit of $100,000. After 20 years, at age 41, the policy will have accumulated a guaranteed cash value of $17,609. By comparison, if the same individual were to wait until they were 40 years old to purchase the policy, they would pay higher premiums, and after 20 years, at age 60, the guaranteed cash value would be $41,328.

The cash value in a whole life insurance policy can be used for various purposes. It can be borrowed against to supplement retirement income, cover emergency expenses, or fund a small business. Additionally, it can provide options for retirement planning, especially when used in conjunction with existing savings accounts and plans like individual retirement accounts and 401(k) plans.

It's important to note that borrowing from the cash value of a whole life insurance policy has implications. It will reduce the policy's cash value and death benefit and may increase the chance of policy lapse. It could also result in a tax liability if the policy terminates before the insured's death.

In conclusion, purchasing life insurance in your 20s allows you to start building a cash value that can grow over time. This cash value can provide financial security and flexibility for you and your loved ones, both during your lifetime and as a legacy for future generations.

Protect those who rely on you financially

Life insurance is a safety net that ensures your loved ones are financially secure in the unfortunate event of your untimely demise. It is a way to protect those who are financially dependent on you, such as your spouse, partner, child, parent, or sibling. Here are some reasons why getting life insurance in your 20s is a wise decision to safeguard those who rely on you:

Lock in Lower Premiums

Life insurance premiums are significantly cheaper when you are young and healthy. By purchasing life insurance in your 20s, you can lock in lower rates, ensuring that your loved ones have a financial safety net without straining your budget.

Protect Your Family from Debt

Life insurance can cover any unsecured debt, such as credit cards, personal loans, or student loans with co-signers. While federal student loans are typically discharged upon the borrower's death, private loans may become the responsibility of the co-signer. Life insurance ensures that your loved ones are not burdened with these financial obligations.

Cover Final Expenses

Funeral costs and other final expenses can be covered by your life insurance policy, sparing your family from these additional financial worries during a difficult time.

Accumulate Cash Value

Permanent life insurance policies, also known as whole life insurance, offer a death benefit and a cash value component. This cash value grows over time and can be accessed later in life to supplement retirement income, help purchase a home, or be passed on to the next generation.

Protect Your Future Insurability

By purchasing life insurance early, you protect your future insurability. As you age, health issues may arise, making it more difficult and expensive to obtain life insurance. By locking in coverage in your 20s, you ensure that you have the option to increase coverage later in life without a medical exam, even if your health status changes.

In summary, getting life insurance in your 20s is a prudent decision to protect those who depend on you financially. It offers peace of mind, ensures financial security for your loved ones, and provides benefits that can be utilised throughout your life.

Frequently asked questions