If you’re like many people, you may not think about life insurance until you’re a bit older, but this can be a financial misstep. Life insurance policies for young adults are often cheaper, which means you might be able to lock in a lower rate that could last the rest of your life, depending on the type of policy you choose. The best life insurance for young adults also provides financial protection for your loved ones if you pass away and can be an important step toward securing your own financial peace of mind. Bankrate can show you why young adult life insurance is important and can help you learn how to choose a policy that fits your needs.

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What is life insurance for young adults?

Just as car insurance protects your finances in the event of a car accident or homeowners insurance protects your finances in the event of unexpected home damages, life insurance provides financial protections for your loved ones in the event that you pass away. Life insurance is designed to cover financial obligations for your dependents or loved ones in the event of an unexpected death. Life insurance for young adults provides the same type of coverage as life insurance for older adults, although your financial goals may be different depending on your current age.

Rather than buying life insurance to leave financial gifts for loved ones, as many older consumers do, young adults may consider term, whole or a universal life insurance policy as a way to start building a nest egg toward retirement, to cover future estate taxes or to guarantee coverage prior to developing medical conditions that could affect eligibility or rates later in life. If you choose term life insurance as a young adult and want the coverage to continue after the policy ends, many insurers allow you to switch your life insurance coverage to a permanent policy.

Why young adults consider life insurance

When it comes to life insurance, young adults may not think about purchasing a policy while in their 20s and 30s. And yet there are several potential benefits to purchasing life insurance while you’re young.

To lock in affordable premiums

Generally, the younger and healthier you are, the lower your life insurance premiums will be. Life insurance for adults usually gets more expensive as you get older, so if you get life insurance when you’re young, you may be able to lock in lower premiums. This could save you from paying higher rates as you age or develop any health issues. If you purchase permanent life insurance when you’re young, your cash value portion will also have more time to accumulate interest or investment returns.

To save you from paying higher prices if your health deteriorates

Most life insurance policies require you to pass a health evaluation or medical exam before finalizing your eligibility and rate. If you have a pre-existing medical condition, it can affect the cost of coverage or even result in a denial. Once you are locked in with life insurance coverage, your insurance company usually cannot increase your premium if you develop a health issue. If your family has a chronic or genetic illness history, getting coverage early before you develop the condition may be a good way to guarantee yourself a lifetime of insurance before it becomes difficult to obtain coverage or too expensive.

To have more time to build cash value

A permanent life insurance policy may be beneficial for young adults as a long-term financial planning strategy. Permanent life insurance coverage does not end after a specific period of time, as it does with term insurance policies, as long as premiums are paid. In addition, permanent life insurance adds a savings element. Your policy includes a cash value feature, where some of your premium is held aside and grows over time. As with all savings and investments, the sooner you get started with a permanent life insurance policy, the larger the cash value will grow over the years.

What type of life insurance policy is best for young adults?

Choosing the best life insurance policy type for you is a personal decision, and choosing among the various types of life insurance may be easier with the help of a financial advisor or licensed life insurance agent. Young adults who have time on their side may find it profitable to be more aggressive with their investing strategy, such as leveraging life insurance, provided they are comfortable with the balance of risk and reward.

For example, a whole life insurance policy’s cash value earns nominal interest — similar to a savings account — and may not be ideal for long-term investment potential. Universal life policies allow you to invest the cash value in stocks and mutual funds, which could provide a larger return. Equities have more potential for growth but come with greater risk due to volatility of the financial markets. Choosing an indexed universal life policy exposes you to moderate risk and allows you to invest in an index, such as the S&P 500, which has historically performed well over long-term investment timelines. Discuss options with your financial advisor or a life insurance agent to see which option may work best for you.

Term life insurance vs. whole life insurance

If you’re trying to decide between term and permanent life insurance, understanding the differences is crucial. Term life insurance provides coverage for a set period of time, typically 10, 15, 20 or 30 years. Term life insurance tends to be cheaper than permanent life, but coverage lasts only as long as the set term. Those who only want coverage for a set period of time, such as when their children are young, may appreciate this limited time frame. Whole life insurance, one common type of permanent life insurance, does not expire as long as premiums are paid, and it typically builds a cash value account for your use while you are alive. You may be able to borrow against the cash value or draw from the accumulated funds. For healthy young adults who can typically qualify for the lowest rates, these aspects may make a whole life policy an attractive option.

Frequently asked questions

    • Generally speaking, the death benefit of a life insurance policy is passed on to your beneficiary tax-free. Beneficiaries typically do not have to worry about paying tax on a life insurance death benefit they receive. However, there can be exceptions, so you will probably want to speak with a tax professional to understand if there are any tax implications in your situation.
    • Parents may choose to purchase life insurance for their children for a few key reasons. Purchasing life insurance for your child provides a death benefit to cover funeral expenses or other costs in case of an unexpected tragedy. In other instances, parents are motivated to purchase life insurance for a child to help make them more insurable in the future and potentially lock in low rates for the rest of their life, especially if the child is either disabled or immunocompromised. Ultimately, whether or not you purchase life insurance for your child is a highly personal financial decision.
    • Yes, it’s common to buy life insurance to help your loved ones pay off your debts if you pass away. Some debts may be forgiven upon your death, but others — especially debts that have a cosigner — may pass to someone else. Your life insurance death benefit could be assigned to the cosigner of your loan, and they could then use that money to pay off the debt.