Getting Life Insurance in Your 20s Pays Off

It's cheaper to buy life insurance when you're young, with more benefits later

Should I Get Life Insurance in My 20s?

Most young Americans are not thinking about life insurance policies, but they should. Life insurance is the ultimate financial tool for those big "what if" moments. It can be useful even when the death benefit is not triggered, as long as it is used appropriately. Life insurance is not a panacea, and some younger Americans may not have the resources to devote to large policies. But it is a mistake to assume that only older couples with children and homes need life insurance.

All else being equal, it is always cheaper, and sometimes substantially less expensive, for a younger person to buy insurance than an older person. This means the potential benefits of insurance can be just as large and cost much less—or maybe much larger and cost about the same. Without other considerations, life insurance for a 22-year-old is a better proposition than life insurance for a 55-year-old.

So, should you get life insurance in your 20s? Read on to find out more and help you decide.

Key Takeaways

  • If you are in your 20s, you may not think life insurance is something you want or need since you're young and likely to be more healthy.
  • But these are the very reasons that could make life insurance more attractive to someone in their 20s.
  • Life insurance policies will always be cheaper in annual premiums the younger you are when you buy your policy.
  • Good health also translates to lower insurance costs, and buying a policy younger also lowers the chances of having an illness like diabetes or heart disease.
  • Life insurance is often a smart financial move, providing a safety net for your loved ones and beneficiaries if you die prematurely, and may even accumulate cash value.

Reasons to Buy Life Insurance Young

The most obvious reason to buy life insurance is when you have clear insurable interests and want to be financially protected from a catastrophic accident. For example, you may have large debt obligations from student loans or a mortgage that you do not want to be passed on to someone else.

You might also have a spouse or children who rely on your income, parties who could depend on insurance claims to survive if something unfortunate happened to you.

Insurance can have other features besides a death benefit, however, which means there might be other good reasons to buy a policy. Some policies provide support for certain medical problems, such as cancer or paralysis. Permanent life insurance policies can serve as tax-advantaged savings vehicles through the accumulation of cash value.

Federal law prohibits insurance providers from selling policies on the basis of their cash value, although this almost certainly happens. This does not mean it is always a bad idea to buy insurance for its possible cash value accumulation. In some circumstances, cash value might accumulate money at a faster rate than other investments with less risk and more favorable legal ramifications.

Types of Life Insurance

Insurance is typically divided into two categories: term and whole life. This undersells the diversity of insurance products available to consumers, since there are many different kinds of term insurance and many different kinds of permanent insurance.

Term Life Insurance

Term insurance is designed to cover a specific set of possible events over a defined period. For example, a level-premium term life insurance policy might offer $200,000 worth of coverage over 20 years and cost $20 per month until the end of the term. A beneficiary is named on the policy, and they receive the $200,000 if the insured party dies or is critically injured. For a 25-year-old individual with little debt and no dependent family, this kind of term life insurance is often unnecessary.

Some term insurance policies allow a return of premiums, fewer fees, and expenses if the insured outlives the policy, and it tends to be more expensive than level term policies.

Decreasing term insurance is a useful option to cover a specific kind of financial liability, such as a mortgage. The face value of a decreasing term insurance policy declines over time, usually because the liability is expected to shrink over time, such as the mortgage being paid down. Even some individuals in their 20s can have insurable liabilities, which means there might be an argument for a decreasing term policy.

Term policies are always cheaper than permanent policies for the same amount of coverage. This is because they expire at the end of the term and do not accumulate any cash value or living benefits.

Permanent Life Insurance

Unlike term insurance, permanent life insurance offers more than just a death benefit that lasts your entire lifetime. Permanent life insurance policies offer the chance to accumulate cash value, and cash value works better for people in their 20s than people in their 50s.

Different kinds of permanent life insurance include whole life, universal life (UL), variable life, and indexed universal life (IUL). The differences mostly center around how aggressively the policy's cash value grows; whole life insurance tends to be the safest and most conservative, and variable life insurance tends to be the riskiest and most aggressive.

Any type of permanent life insurance could pay off for an individual in their 20s, assuming they can afford the policy, which is often hundreds of dollars per month. The policy still offers a death benefit, but the cash value can be very useful even if the death benefit is not triggered for decades.

Permanent life insurance policies can be structured so that they are fully paid after a period of 10 or 20 years. Then the coverage remains in effect for your entire life.

Understanding Life Insurance Cash Value

Cash value is an interesting and important feature of permanent policies; many insurance providers refer to cash value as part of a "living benefits" package as opposed to a death benefit. As money is paid in by the insured, a percentage of the premiums is kept in the policy and accumulates interest. This money may be accessed later to pay for other life events such as weddings, home purchases, children's schooling, and even vacations. Most critically, this money usually grows and is usually withdrawn without creating a tax liability.

Even low-interest whole-life policies can provide a healthy dividend on the cash value. This dividend can be collected or used to increase the cash value. It is conceivable, although not guaranteed, that a permanent life insurance policy could significantly increase retirement income, again tax-free, or even allow you to retire early.

Pros and Cons: How Insurance in Your 20s Can Pay Off

A cash value that builds for decades can amount to hundreds of thousands of dollars in future tax-free income. This can be an important aspect of a comprehensive retirement plan, especially if you already plan on maxing out an IRA. This strategy only works if premiums are paid consistently; permanent life insurance policies lapse if the cash value gets too low, which leaves the policyholder without coverage.

In addition, you'll have life insurance coverage in the event that you die prematurely, even if you start a family later in life. Even without heirs, you can use the death benefit to leave a legacy to a charitable cause or philanthropic purpose. If you begin accumulating cash value in your 20s, you will see the benefits of compounding that can mean significant value later in life.

On the downside, you may never end up needing the coverage. If you stay single and do not care about leaving a financial legacy, you would be spending money on something you didn't use. The other con is the idea to buy term and invest the rest. This means that there is an opportunity cost involved in paying costly insurance premiums since that money could have been used elsewhere, such as investing in the stock market. However, the stock market comes with risk, while insurance contracts are extremely low-risk.

Pros and Cons of Getting Permanent Life Insurance in Your 20s

  • Lower premiums than if you get insurance when you're older

  • Death benefit coverage for longer period of your life

  • Accumulated cash value can be used while you are alive

  • May have option to increase coverage at a later date without a new medical exam

  • May have to pay premiums for a longer amount of time

  • May not need the insurance coverage, at least initially

  • Money put to premiums could have been used elsewhere (opportunity cost)

Should I Get Long-Term Life Insurance in My 20s?

If you plan on having a family one day, getting life insurance before you get married can save you money in the long run. This is because insurance premiums are less expensive when you are younger and healthier. Even if you don't plan on having a family, things can change. You may also want to consider insurance if you have any large debts or other obligations outstanding unrelated to family matters.

How Many People in Their 20s Have Life Insurance?

According to LIMRA, an insurance industry research center, the number of people under 25 who have purchased a policy has gone up significantly over the last decade, rising from 28% in 2011 to 38% in 2020. Among those aged 25 to 44, 55% had life insurance coverage in 2020.

Is It Too Early to Get Life Insurance in My 20s?

It depends If you are single and do not have a family or are not planning to start one, you may not need life insurance in your 20s. If you think you will, even later in life, getting it younger can have its advantages.

Is It Better to Get Term Life Insurance or Whole Life Insurance in Your 20s?

Because insurance is less expensive in your 20s, it might make sense to consider a permanent policy like whole life. This coverage will last until you die, regardless of age. You can consider structured whole-life payment schemes such as 10-pay or 20-pay policies that become fully funded after just 10 or 20 years, and then you have the coverage forever.

In addition, whole-life policies will begin accumulating cash value that compounds over time as dividends are credited. You can borrow against this money or make withdrawals while you are still alive on a tax-advantaged basis.

A term policy may expire while you still need coverage if you buy it young, causing you to purchase an additional, more expensive term policy later on when you are older.

The Bottom Line

Even if you cannot afford a permanent life insurance policy, most 20-somethings can receive very good term policies for very low costs, such as $200,000 to $300,000 in coverage for $15 to $20 a month in some cases. More importantly, some term policies can last for 20, 30, or 40 years; you could be covered at a very low cost throughout your entire working life.

Article Sources
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  1. National Academy of Sciences. "Key Features of the Affordable Care Act by Year."

  2. LIMRA. "2020 Insurance Barometer."