Do You Need Life Insurance in Your 20s?
Building a strong financial foundation in your 20s begins with having the right tools. A budget is one thing you'll need, especially if you're focused on building an emergency fund, saving for retirement or paying off debt. Life insurance is something else you may want to add to your toolbox.
But does life insurance for young adults make sense? A 2017 Princeton survey commissioned by InsuranceQuotes.com found that 65% of 18 to 29-year-olds don't have life insurance. Of those who lacked coverage, 71% said it wasn't necessary because they're young and healthy.
There are, however, some good reasons to consider buying life insurance in your 20s.
The Benefits of Life Insurance for Young Adults
Life insurance can fill several different financial needs. First and foremost, it can replace lost income for your loved ones if you leave behind a spouse or children who depend on your paycheck to cover day to day expenses.
If you're a 20-something, you're more likely to be single and childless—but that doesn't mean you'll stay that way. You may decide to settle down in your 30s or later and at that point, the appeal of life insurance may become clearer. The downside, however, is that by waiting to buy, you may be facing higher premiums. As a general rule, life insurance for young adults is less expensive the younger you are when you initially purchase it.
Aside from replacing lost income, life insurance can also be used to pay off any debts owed by your estate. In your 20s, your largest debt can be student loans. According to Federal Reserve data, 20-somethings who owe student loans carry an average balance of just over $22,000. Federal student loans are automatically canceled and discharged. That includes Parent PLUS loans. If you owe private student loans that your parents cosigned for, on the other hand, it's a different story.
Legally, cosigners share equal responsibility for a debt. If your parents cosigned on your loans and you pass away, your lender may still expect them to pay what's owed. A life insurance policy could allow your parents to zero out the rest of the debt.
Life insurance can also reduce the stress of paying for funeral or burial costs, or any other final expenses. The National Funeral Directors Association puts the median cost of a funeral at $8,755, while cremation costs a median of $6,260. Even a small life insurance policy could be a good investment if you don't want to saddle your loved ones with those costs.
What Kind of Life Insurance You Need
In terms of options, life insurance for young adults generally falls into two main categories: term life and permanent life insurance.
Term life insurance covers you for a set term. Depending on the policy, that may be anywhere from five to 30 years. This kind of policy pays a death benefit to your beneficiaries if you pass away before the term expires. You can get a policy with a death benefit as low as $5,000, or as much as $2 million, depending on your individual situation.
Permanent life insurance is designed to cover you for as long as you pay the premiums. Whole life is one type of permanent life insurance policy; universal life is another. Both allow you to build cash value in your policy that you can borrow against. With both term life and permanent life coverage, your premium stays level, meaning it won't go up or down over time.
So which one is better in your 20s? Aside from how long you're covered and the cash value feature that permanent coverage offers, the biggest difference between the two is cost. Term life policies tend to have much lower premiums compared to permanent life insurance. If you're just starting out in your career, a lower premium may be more appealing from a budget perspective.
Of course, if you buy a permanent policy when you're younger, you could potentially accumulate a decent amount of cash value. And because you're younger, that money will have longer to earn interest. On the other hand, you could earn a higher rate of return by choosing term life instead, then investing the difference between the cost of term life and permanent life premiums in an individual retirement account or a taxable brokerage account.
Tips for Buying Life Insurance
Life insurance for young adults isn't one-size-fits-all and if you're ready to buy, it helps to do your homework beforehand.
First, think about how much coverage you'll need. A good life insurance calculator can help you pinpoint a number. Then, think about what your budget can afford and how long you need to be covered. That can make it easier to choose between term and permanent life.
Next, scout out your options for buying. Check with your employer first to see if life insurance is offered as part of your benefits package. If coverage is available, you may be able to get a discount by purchasing it through your company.
Once you've got the rundown on what your employer offers, you can branch out your search. An insurance agent is one option; you could also try searching online to get life insurance quotes from multiple insurers. Compare the policies being offered and the premiums to find the policy that best fits your needs. Time is on your side, after all. While you may recognize the need for life insurance in your 20s, you don't want to rush into a buying decision without getting all the facts first.