Buying Term Life Insurance In Your 20s
Looking to buy a policy but unsure how? Here’s what you need to know about buying term life insurance in your 20s.
Life insurance is not a popular topic among people in their twenties. For most, life has already gone from zero to sixty in the blink of an eye. You are only beginning to recognize the changes in your life.
Not everything is about you anymore: you have shared lives, financial responsibility, and often shared dependents that will need care should you pass away unexpectedly.
Weighing the financial impact of your death on friends and family feels wrong for people in their twenties. Everyone believes they still have so much of their lives ahead of them. Who wants to think about an untimely death?
The fact of the matter is your twenties are exactly the time to consider buying a life insurance policy. There are benefits and drawbacks to buying life insurance young, but the advantages far outweigh the costs. Let’s examine the pros and cons of buying term life insurance in your 20s, and why term life insurance is probably your best option.
Pros of Buying Life Insurance
Tax-Deferred Growth (Permanent Life Insurance)
Permanent life insurance policies bear the advantage of an investment component that allows policyholders to grow wealth tax-free. Many investors buy a permanent life insurance policy and invest additional capital, putting their money to work.
Lifetime Or Term Coverage
Life insurance policies can be purchased for life (permanent) or for a set number of years (term). Permanent coverage carries a higher premium payment each month, but over time often pays far more than the policy value over time. If you properly manage the investment component, your beneficiaries can end up with significantly more money than the original stated policy value.
Term life insurance is far less expensive, but when the term expires you must reapply if life insurance is still needed. Buying life insurance when you are in your forties and fifties can be significantly more expensive than buying when you are in your twenties.
Most people buy a term life insurance policy for long enough to pay off their outstanding debts. Buying term life also means you can afford significantly more coverage for a much lower monthly premium.
Borrow Cash Value (Permanent Life Insurance)
Permanent life insurance policies accrue cash value over time as you pay your monthly premium. This cash value can be borrowed against that for college expenses, a down payment on a house, or just about anything you want.
Borrowing against a retirement account’s cash value usually comes with hefty fees and penalties, adding to the expense of your loan. Borrowing against permanent life insurance cash value is a better financial decision: you will pay no/fewer fees, and it will cost you less.
Best of all, the interest on a life insurance cash value loan pays back into your life insurance policy. This means you are adding value to your policy as you repay the loan. It’s a win-win.
Both permanent and term life insurance policies can carry accelerated benefits advantages. Accelerated benefits are policies that allow you to receive a percentage of your death benefit before your death if you are diagnosed with a specific health condition.
Heart attack, stroke, cancer, or other chronic illnesses often qualify for up to a one hundred percent payout. That money can make a significant difference in covering your medical bills or improving your quality of life in your final months.
Determining how long your term life insurance coverage lasts lets you control monthly premiums far more easily than permanent life insurance. You can quickly and easily calculate the cost of your life insurance over the lifetime of the policy, too.
It’s critical to understand the lifetime cost of your policy versus your death benefit before taking out a policy. Otherwise, you may be stuck paying for a policy that costs you more than the policy is actually worth.
The Ability To Convert Term Life Insurance To Permanent Insurance
Most insurers have a system in place to convert your term life insurance policy to a permanent life insurance policy using the rates you would have received when you signed up for a term life policy. You can rest easy knowing that if your insurance needs change or your financial situation is altered, you can always convert it. Term life insurance may make sense right now, but long term you may find that a permanent policy better suits your needs as you get older.
Cons of Buying Life Insurance
Taxes & Penalties
Some say the only certainties in life are death and taxes, and this aphorism applies to life insurance as well. Permanent life insurance death benefits are free but could become taxable if you have any outstanding loans against the cash value. More importantly, if you surrender the policy before any outstanding balances are paid, you or your beneficiaries may be held financially liable for any balance owed.
Additionally, receiving accelerated benefits and loans can reduce the death benefit, leaving less to settle your financial affairs. If you are on top of your finances when you pass away, this is unlikely to affect you or your loved ones.
If you aren’t, then you should carefully weigh the pros and cons of buying a life insurance policy. Above all, know what you are financially responsible for borrowing against a policy or receiving accelerated benefits.
High Premiums (Permanent Life Insurance)
Permanent life insurance policies can be prohibitively expensive for most people on an entry-level income. Depending on your financial situation, you may only need a much less expensive term life policy.
If all you need is coverage for a few decades to provide for your family and debts, term-life is your best option. Unless you plan on using your life insurance as part of an investment or wealth-building strategy, it’s probably not for you.
No Cash Value (Term Life Insurance)
There are zero long-term investment options or borrowing benefits for term life insurance policies. If you are considering life insurance to bolster your financial situation or as a long-term financial product, you should probably consider investing in a permanent life policy.
When the term of your policy expires, you must reapply for coverage under new terms at a new rate. Your new premium is likely going to be higher due to age and any changes to your health.
It isn’t a problem if you only need coverage for a while to pay off debts and establish yourself financially. If you want to provide for your family after you pass regardless of when that happens, permanent life may be a better option.
Reasons To Buy Life Insurance In Your 20s
Not everyone who is twenty and older needs life insurance, but many do. Let’s look at the most common reasons people in their 20s need a life insurance policy.
Even if you pass away unexpectedly, your next of kin can be held financially responsible for any outstanding debts in your name. Do you have any joint debt? Your co-signer or co-account holder will take on primary responsibility for that debt should you pass before it is repaid.
Mortgages, leases, student loans, auto loans and consumer debt like credit cards will still need to be paid. Even after you are gone. Buying life insurance coverage ensures your financial responsibilities are met. And no one must suffer both your loss and financial hardship.
When you marry, you enter into a legal and financial arrangement with rights and responsibilities to your spouse. Funerals can be expensive. Any shared debt or obligations like rent or a mortgage will still need to be paid.
Maintaining life insurance for yourself and your spouse is part of being a responsible partner. You don’t want to leave them in dire financial straits should you pass away unexpectedly. They will already be coping with your loss, and no grieving spouse needs the additional stress of financial uncertainty.
It is estimated that the total cost of raising a child from birth to age 18 is around $285,000. That number doesn’t include a college education either. As a responsible parent, you must ensure they will be provided for should your journey with them end unexpectedly. A life insurance policy will help any surviving parent or guardian provide a good life for them without you.
In your twenties, you are young and relatively healthy. That being said, life throws everyone a curveball now and then. While you may be healthy now, there is no guarantee you will remain that way as you age. Securing a life insurance policy when you are young and at your healthiest means significantly lower premiums regardless of the type of policy.
After all, neither the insurance company nor you anticipate that you are likely to pass away anytime soon. Once you lock in that rate, you have it until the term expires or until you pass away (permanent insurance). It’s best to take out a policy as young as you can to get the best premium rate.
Why Term Life Insurance Makes Sense For People In Their 20s
Bottom line, term life insurance is the optimal choice for people in their twenties. You only pay for as much insurance as you need. And higher coverage amounts cost far less than permanent life insurance policies. Moreover, you almost always have the option to convert your policy to a permanent one before it expires. This is if you decide it is a better financial fit.
If you need a term life insurance policy but aren’t sure where to start, NextGen Life Insurance is here to help. Get your free quote today or call us at 646-216-4199 to get started.