Life insurance gets expensive as a person gets older, given the increased prevalence of health issues and likelihood of death. By using cash value policies, young adults can purchase life insurance at a much cheaper rate that remains locked in over time. Compounding interest on these smaller amounts helps these policies accumulate a sufficiently large cash benefit over time. Individuals simultaneously benefit from the coverage during their younger years.

In this article, we’ll take a look at the benefits and costs of getting a whole life insurance policy as a young adult and some potential alternatives. (For related reading, see: Pros & Cons of Indexed Universal Life Insurance.)

Early Considerations

There are many factors that come into play when deciding between a whole life insurance policy or the many alternatives, such as term life insurance policies. For those looking for long-term security, whole life insurance policies provide lifelong protection with a predictable premium and a guaranteed death benefit. Those looking to ensure only a specific time during their life when they may be the most vulnerable, however, may be overpaying for the policy.

Some important questions to ask yourself include:

  1. What’s the risk you’re insuring against? For example, many people purchase life insurance when they have children to provide for in the event that they pass away unexpectedly. These risks may disappear when children turn 18 years old and become capable of providing for themselves. In these instances, a term life insurance policy may be preferable to a whole life insurance policy.
  2. How are you saving for retirement? Often times, whole life insurance policies are used as a supplemental way to save money for retirement due to their tax-advantaged treatment. These policies may be appropriate as part of a larger retirement strategy, but they may be a poor choice as a primary investment strategy given that the ideal payout (from a tax standpoint) occurs upon the death of the policyholder. (For related reading, see: Whole or Term Life Insurance: Which Is Better?)

Cost Benefit Analysis

Let’s suppose that two 20-year-old friends — Brian and Tom — decide to purchase insurance policies at the same time, with one choosing whole life and one choosing term. Brian purchases a $500,000 whole life policy with a monthly premium of $200. Over the course of 20 years, the policy will cost approximately $4,000 in premiums and may potentially earn a couple hundred dollars in interest. He will be able to pay the same $200 monthly premium for his entire life, while potentially taking out loans against the cash value of the policy down the road to cover the cost of future premiums.

Tom decides to purchase a $500,000 term life insurance policy with a monthly premium of $33. Over the course of 20 years, the policy will cost approximately $660 in premiums, but he will lose that money entirely at the end of the term. He will be able to invest the money he saves — $3,340 — in the stock market at an average return of 7% per year over 20 years, which earns him about $12,925 in capital gains in a tax-deferred account.

The term life insurance policy is cheaper and often makes more financial sense for younger people, but the whole life insurance policy provides peace of mind in knowing that premiums won’t increase down the road beyond where they’re at now. In general, most young adults are probably better off financially purchasing term life insurance, although there are many instances where a whole life policy may make sense.

The Bottom Line

Life insurance can be a difficult decision to make, especially for a young adult evaluating his or her options. While term life insurance tends to be cheaper, whole life insurance policies provide a predictable lifelong premium and a guaranteed death benefit, as well as a cash value that may be borrowed against over time to offset the costs of future premiums. These are all important factors to consider when making this important life decision. (For related reading, see: Life Insurance: Putting a Price on Peace of Mind.)

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