Life insurance for young adults

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. The best life insurance for young adults can serve a variety of purposes. These may include covering financial obligations for your dependents, leaving a charitable gift for a cause you care deeply about or ensuring that your end of life arrangements are paid for. Life insurance for young people 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.

Do young adults need 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 an advantageous component of a long-term financial strategy for young adults. Unlike term insurance policies, which only offer coverage for a set period of time, permanent life insurance offers continuous coverage as long as premiums are paid.

One of the key features of permanent life insurance is a cash value component. With a cash value component, a portion of your premium is allocated to a savings account and accrues value over time. Starting a permanent life insurance policy at a younger age can significantly enhance the potential growth of this cash value. This matured cash value can serve as a financial resource, allowing policyholders the option to borrow against it. However, it's important to note that any unpaid loans against the policy's cash value could reduce the policy's death benefit.

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. permanent life insurance

When considering life insurance for young adults, it's important to understand the differences between term and permanent life insurance. Term life insurance is often selected for its simplicity and affordability, providing coverage for a set period, such as 10, 15, 20 or 30 years. It may be ideal for policyholders who only need coverage for a certain period of time, such as until their mortgage is paid off. Because there is the chance you will outlive your policy term and get no payout, these policies typically come with cheaper premiums.

Permanent life insurance, in contrast, offers lifelong coverage and includes a cash value component. This category includes several types, each with distinct features:

• Whole life insurance: Features fixed premiums and guaranteed cash value growth, offering predictability and stability.
• Universal life insurance: Offers flexibility in premium payments and death benefits, allowing adjustments to suit changing financial situations.
• Variable life insurance: Enables policyholders to invest the cash value in different accounts, potentially increasing growth but also carrying higher risk.
• Variable universal life insurance: Combines the investment choices of variable life with the premium and death benefit flexibility of universal life.

These various forms of permanent life insurance cater to diverse financial needs and goals, making it important for individuals to consider their long-term financial planning when choosing the right type for their circumstances. Speaking with a licensed financial professional may be helpful in choosing the right policy type for your circumstances.

Frequently asked questions