Life Insurance for Young Adults: How to Choose a Policy

Updated

If you’re a young adult (aged 18-25) or the parent of a young adult, this article is a must-read for you. Before we look at how to choose a life insurance policy, we’re going to examine if young adults even need life insurance, what type to buy if you want to own a policy, what the cost is, and what the best age is to apply for a policy.

Jump ahead to these sections:

Young adults are often pressed in on all sides financially. You may have student loans you’re paying off, a car payment, credit card bills...it adds up. You might even think that only older adults buy life insurance, but that’s not necessarily the case. Let’s investigate.

When Is Life Insurance Worth It for a Young Adult?

Buying a life insurance policy is a smart choice for any young adult that:

  • Will burden someone with funeral costs if they die without insurance. With the average funeral now averaging about $10,000, paying for a funeral can be a challenge for most families. However, knowing that you won’t be leaving behind a big burial expense bill can give you and your family peace of mind.
  • Has someone depending on them financially. Depending on your financial circumstances, you might be helping a grandparent survive on more than just their Social Security check, or providing parents with a financial cushion considering how they’ve helped you financially over the years, or giving a sibling some tuition assistance. 
  • Wants to save for the future. Studies show that people who start saving in their early 20s end up with substantially larger retirement accounts than someone who waits even just ten years longer. Some types of life insurance policies even accumulate cash value, which can be withdrawn or borrowed from whenever you want, like when purchasing a home or paying off a student loan.
  • Has had someone co-sign for them on a loan. If you’ve had someone co-sign with you on any kind of loan, you don’t want to leave them behind with your loan balance when you die. With life insurance, for pennies on the dollar, you can make sure any loan with your name on it gets paid off in full when you pass away.
  • Wants to leave a financial gift behind when they die. Is there an educational institution that changed your life, and you wish to endow them with some funding when you die? Would you like to leave a lump sum of cash to someone special in your life? 

If you, as a young adult, want peace of mind knowing that you’ve protected other people financially by buying life insurance, then the small monthly premium you’ll pay will be well worth it. (We’ll look at cost later.)

» MORE: Need help with funeral costs? Create a free online memorial to gather donations.

When is Life Insurance NOT Worth It for Young Adults?

Because of how inexpensive life insurance is for healthy young adults, there aren’t many scenarios where you couldn’t find a single positive reason to have it. However, an argument could be made for not having life insurance if you:

  • Don’t owe anyone any money
  • Don’t have a co-signer on any loan under your name
  • Have enough money in savings to pay for your funeral
  • Don’t want to leave a financial gift for anyone
  • Have sufficient life insurance through your employer

Life insurance isn’t something you usually buy for your own financial benefit; it’s to help others financially. If you can’t think of anyone right now who you could help pay their bills or enjoy a lump sum of money when you die, then life insurance may very well not be worth it to you today. But it might be tomorrow.  

Why Do Young Adults Get Life Insurance?

Young adults fill out life insurance applications for a variety of reasons:

  • Charity: They want to leave money behind to a person, organization, or institution.
  • Obligation: They want to fulfill their financial obligations.
  • Tradition: Every significant adult role model in their life owned life insurance.
  • Pressure: Someone important to them is pressing them to buy a policy.
  • Guilt: They feel guilty for not having it.

None of these are necessarily poor reasons for a young adult getting life insurance, but some are a bit more altruistic than others. What ultimately matters is that when they die and have life insurance, other people will benefit.

What Types of Life Insurance Would a Young Adult Consider?

Just as there are multiple reasons to have life insurance, there are multiple types of life insurance young adults can consider. Among them are term life, whole life, universal life, variable life, and final expense insurance. These types can be put into one of two categories: permanent life insurance and term life insurance. Let’s look at both.

Term life insurance

This is a popular type of life insurance for young adults. It’s the lowest-cost life insurance you can own when you’re a young adult because it’s temporary insurance, almost like insurance you can rent.

A young adult can select a death benefit amount and lock in low premiums for a term of one year, five years, ten years, twenty years, or thirty years. If they die while the insurance is in force, their beneficiaries will receive a tax-free death benefit. If they outlive the term length of the policy, the policy expires without paying a death benefit to anyone. The insured adult is only out the premiums they paid while they had the policy. 

Permanent life insurance

There are many different types of permanent insurance (whole, universal, variable, variable universal, split-dollar), but they all have several common features:

They accumulate cash value. The premiums you pay for your permanent life insurance policy are split a couple of ways. One portion of the premium pays for the cost of the life insurance and policy fees and expenses. The other portion accumulates cash value, which can be likened to a savings account.

Similar to a savings account, the money that goes into the cash value portion of the policy is credited interest, which compounds over time. The policy owner can withdraw or borrow money from the cash value as it builds, which can be used for many purposes, such as a down payment on a home, funding for children’s college education, or supplementing retirement accounts.

The premiums never go up. With whole life insurance in particular, as long as you keep the insurance in force, your premiums will not increase as you get older. Your premiums could conceivably increase with universal life insurance under certain conditions, but those are exceptions.

The policy never lapses. Whole life insurance is called that for a reason: you can keep it your “whole life” as long as you keep paying the fixed premiums. 

As you can see, permanent life insurance has its benefits. But it does have one rather significant drawback: cost. Side by side with a term life policy with the same death benefit amount, permanent life insurance can be three to five times more costly for a young adult than the comparable term policy. This can be particularly challenging for young adults as they are often not on solid footing yet financially and aren’t near their peak earning years.  

How Much Does Life Insurance Typically Cost for Young Adults?

Term life insurance is significantly less expensive than permanent life insurance. For example, a 30-year term life insurance policy with a death benefit of $100,000 is available for less than $15 per month (depending on the insurer). On the other hand, a similar whole life insurance policy for the same individual could easily exceed $50 per month.

It sounds like a simple decision, but remember that the term life insurance policy is temporary, expires without value if you outlive it, and doesn’t have the cash value savings component that permanent insurance does.

How to Choose a Life Insurance Policy as a Young Adult

Now that you know what your options are as far as the different types of life insurance policies, how do you choose the best one to meet your individual needs? There are two ways you can do it: online or in person. Here’s a comparison.

» Did you know? Caskets can be bought online, without the funeral home markup. Find the perfect casket

In person

This is when you meet with an insurance agent to get quotes on different types of policies. A professional life insurance agent will take the time to get to know why you want the policy, how long you’ll need it, and what your budget is. (Life insurance premiums are set by the insurance company, so an agent can’t overcharge or undercharge you.)

It’s preferable if you meet with a broker who represents multiple life insurance companies instead of a “captive agent” who only represents one company. A broker can compare policies with you and provide you with different features and price points. A captive agent will often try to make their policy fit you, even though it’s not the ideal solution.

Online

If you Google “life insurance for young adults,” you’re going to find many websites that will provide you with the policy and pricing information you’re looking for. Quite a few of these websites compare many different insurers' policies and rates with you, much like a life insurance broker would when meeting with you in person.

With many of these websites, not only can you learn about the different types of policies and get prices quoted, you can even apply online without having to meet with an agent. Many young adults prefer to shop anonymously and provide their personal information only when they’re ready to buy.  

Frequently Asked Questions: Life Insurance for Young Adults

We’ve covered a lot of ground so far, but here are a few more questions that people often ask.

What’s a good age to get life insurance?

The best age to buy life insurance is when you’re young and healthy. The rates will be lower for you than they’ll ever be (they go up every year), and you might never be as healthy as you are now (you have to be in good health to get reasonably priced life insurance).

Should single young adults get life insurance? 

While many more married young adults buy life insurance than single young adults, singles still may need life insurance to pay for final expenses, pay off debts, leave money behind for loved ones, etc. The need will vary significantly from person to person.

How can you find the lowest rate as a young adult?

An experienced broker or life insurance website can find you the lowest rate for what you’re looking for as far as the face amount and how long you want the policy. But a low price doesn’t always mean you’re getting the best value. Make sure the company has strong financial ratings and a reasonable number of consumer complaints.

The Price is Right

Life insurance companies aren’t exactly giving life insurance away, but their pricing for young adults has never been better. Because people are living longer, life insurers have lowered their rates. You’re going to live longer, so they’ll have more time before they have to pay a claim on your policy. 

If in doubt, choose a small face amount for a premium you can afford. The odds are you’ll thank yourself years later for taking care of yourself and others today. 

Categories:

Icons sourced from FlatIcon.