> Taking the Next Step
When you’re in your 20s, especially your early 20s, life insurance is probably the last thing on your mind. You might be preoccupied with getting your career off the ground, meeting your basic expenses, and figuring out how to handle all the other responsibilities of being an adult. You also might be single, with no spouse or kids who depend on your income. So why would you want to buy life insurance?
In fact, there are some compelling arguments for buying life insurance well before you think you might need it: life insurance costs less when you’re younger, and you may develop health issues as you get older.
“One of the most overlooked benefits of purchasing insurance at a young age is the ability to lock in your future insurability,” said Matthew Carbray, a Certified Financial Planner® with Ridgeline Financial Partners/Carbray Staunton Financial Partners in Avon, Connecticut, in an interview. (Calculator: How Much Insurance Do I Need?)
If your health declines as you age — if you develop a chronic condition such as high blood pressure, high cholesterol or Type 2 diabetes that isn’t well managed by medication, diet and lifestyle changes; if you develop coronary artery disease; if you get diagnosed with a high-risk cancer; or if your weight creeps up over the years and pushes your body mass index into the obese category, you might become uninsurable or have to pay a higher rate, according to an analysis by the personal finance website Bankrate.com.1
If that happens, you’ll still have the option to purchase guaranteed acceptance life insurance, which locks in coverage and premium rates for the life of the policy. Policy benefits may be limited for the first two years, but your medical history doesn’t matter. You won’t have to complete a medical exam, either. You won’t be able to buy nearly as much life insurance with this type of policy, however; it’s meant only to cover your final expenses, not to help replace your income and provide ongoing support for your family. In addition, some providers have an age floor on these policies, according to a 2016 survey by personal finance website NerdWallet,2 meaning you might not be able to buy one until you’re at least 50 years old. Going without life insurance for decades is a risky move.
Term versus Permanent Life Insurance
There are two basic categories of life insurance. Term life insurance provides a death benefit for a specified period of time. Permanent life insurance also offers a death benefit, and sometimes other features, but without the time restriction. And it tends to cost more. So many people with tight budgets tend to lean towards term life insurance coverage.
But many term life insurance policies offer convertibility, meaning the full policy or a fraction thereof can later be converted to permanent life insurance, Carbray said.
In other words, getting an inexpensive term policy while you’re young and healthy keeps your options open to switch to a different type of life insurance that might be appropriate when you’re older.
Carbray said he thinks it’s a very good idea to purchase life insurance in your 20s to lock in your insurability. You can protect current and future liabilities for a negligible cost with term life insurance, he said. If you wait until your 30s, your premiums will be higher because you’re older and you risk being less insurable. In addition, most of his clients get more proactive about seeing a medical professional as they age and start a family, he said, and medical issues can be identified then that can result in adverse underwriting.
Someone in their late 20s who starts a family young needs life insurance to protect against the costs of caring for young children, inflation-adjusted future college expenses for the kids, and paying off liabilities such as a mortgage and student loans, Carbray said.
While federal student loans are discharged when you die,3 private student loans may not be, depending on the provider.4 Your estate or your cosigner, if you have one, may be responsible for paying them. Review your loan terms to see what happens to the debt if you die before you’ve repaid it in full.
“Even single people with no dependents should have some life insurance,” said Rebecca Schreiber, a Certified Financial Planner® and cofounder of Pure Financial Education, a financial planning firm serving early career professionals in Washington, D.C. “Someone is going to have to take off work, get your stuff and arrange a proper send-off.”
If you have life insurance, she said, your loved ones have time to make arrangements and time to focus on grieving and healing. The more money you leave them from your life insurance policy, the more time they can take off before returning to the stresses of their everyday lives.
Make sure the person you designate as your beneficiary knows you have designated them and has the name and contact information for the company that issued your policy. According to the Insurance Information Institute, an organization whose goal is to improve the public’s understanding of insurance, life insurance benefits sometimes go unclaimed for several reasons.5 The insurer might not know that the policyowner has died, or the contact information you provided about your beneficiary when you took out the policy might have changed, making it difficult for the insurance company to locate them even if it is aware of your death.
If affordability is an issue, you might find a small life insurance policy offered as a perk of holding a certain credit card or belonging to a certain credit union, Schreiber said. You might also have a life insurance benefit through work.
An established life insurance policy can also provide planning options for retirement. Sure, that may seem like a long way away, but when the time comes steps taken earlier in life often provide income options that make the transition easier.
For instance, the cash value in a whole life insurance policy can give you retirement planning options in conjunction with existing savings accounts and plans, like individual retirement accounts and 401(k) plans. Retirement savings plans are often tied to market based investments. When markets are not performing well, investors may be able to borrow tax-free from their whole life insurance cash value to supplement retirement income, allowing them to preserve the principal in their retirement accounts to take advantage of any market bounce back in the offing. (Related: Protecting Yourself Against Market Fluctuations in Retirement).
But there are implications to borrowing from the cash value of a whole life insurance policy. Such actions will reduce the policy’s cash value and death benefit. This could also increase the chance the policy will lapse, and it may result in a tax liability if the policy terminates before the death of the insured.
The wisdom of using the cash value available in a whole life insurance policy for income in retirement will vary depending on individual circumstances. Many people seek out a financial professional for advice before planning such a move.