“Should I get life insurance in my 20s?” It depends.
Do you love somebody? Do you owe somebody? If you answered “yes” to either of those questions, get life insurance. If you answered “no,” it’s probably unnecessary.
Life insurance can be a critical component to our financial foundations, but there are many people who don’t need to own it. My goal is to share what I’ve learned over my 20+ years as a financial advisor helping people decide if they need life insurance. Specifically, when a 20-year-old should have it, and when they shouldn’t.
Here’s what we’ll cover:
- You love somebody
- You owe somebody
- A life insurance overview
- Additional considerations
Let’s get started.
You love somebody
Depending on the “somebody,” life insurance may be an excellent product for you to own.
Quickly, life insurance pays a death benefit to a beneficiary in the event the insured passes away. Meaning, if you own a life insurance policy and you die, the person you designate as the beneficiary gets the death benefit.
Here are some common relationships/situations that motivate young people to buy life insurance:
- You get engaged or married
- You have a child or marry someone with a child
- You’re financially responsible for the wellbeing of a loved one (child, siblings, aging parent, friend)
If you find yourself in any of those situations, it’s probably prudent for you to buy life insurance.
You owe somebody
Part of being a grownup is taking on debt. When you take out a loan, it may be wise for you to buy life insurance. What happens to debt when you die? Here’s an overview:
- Medical bills: Your estate will be responsible for the payment of any outstanding medical bills
- Student loans: Federal student loans will be discharged at your death (they will go away)
- Home loans: Your estate will take over the mortgage, or selling the house to pay off the mortgage
- Credit card debt: Your estate will be responsible for the debt
- Vehicle loans: Your estate will take over the payments, or selling the vehicle and paying off the loan
Does everyone have an estate? Yes. Your estate comprises everything you own.
When a young person dies, it’s terrible. After the grieving, there will be details which need to be attended to. All of your debts will need to be taken care of. Because of this, it could make sense for you to purchase life insurance should you owe money to others.
A life insurance overview
How much does life insurance on a 25-year-old cost? While your actual premium will depend on several variables, a $1 million dollar term policy can cost around $25 a month.
There are primary types of life insurance, term and permanent. The simplest way to describe the difference is to think about buying a house versus renting an apartment. Term is like renting, permanent is like buying.
Term insurance is pure life insurance protection. You buy it in increments of time (5, 10, 20 and 30 years) and death benefit. For example, you might buy a 20 year policy with a $1 million death benefit. The premium might be $25 a month, and it will remain $25 a month for all 20 years. Should you die at any point during the 20 years, your beneficiary will receive the $1 million death benefit. At the end of the 20 years, if you’re still alive, the coverage will go away.
Permanent insurance combines the benefits of term insurance with some elements of home ownership. Like term, you select the death benefit and premium payment period. Unlike term, at the end of the premium payment period, you’ll own the policy, you just won’t have to pay the premium anymore. Kind of like when you buy a home with a 30-year mortgage; at the end of the 30 years, you’ve paid off your loan and you own the home.
Permanent insurance also has a cash value component, not unlike the equity in home. As your policy cash value increases in value, you may access it for other financial priorities.
There are a lot of different permanent life insurance policies offered by lots of different companies. Should you decide to explore this type of coverage, make sure you educate yourself on the policies you’re looking at.
Should you decide life insurance is right for you, you’ll need to decide on the death benefit (also known as face amount). You may choose to buy enough death benefit to pay off your debts, or you may choose to replace your income. To help you determine the proper amount, I encourage you to use this life insurance needs calculator.
One last word on life insurance, specifically infinite banking (also known as private banking). Certain types of permanent life insurance have a cash value component, which I touched on briefly. These policies can be used as tax-preferred savings accounts, and many banks and corporations purchase them because of those benefits.
I recommend no one (whether you’re in your 20s or 50s) purchase life insurance as an accumulation vehicle unless you’re already on track to reach all your financial goals and objectives. Let me put that another way; unless you’re already saving and investing enough in your IRA, 401(k), brokerage account, or real estate portfolio, don’t buy permanent life insurance.
I commend you for looking into this important coverage and hope I’ve been of service. If you’d like to have a no-cost chat, you can connect with one of our Certified Partners.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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