How Much Life Insurance Do I Need in My 20s
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Many people think of their 20s as the time to have fun, explore, try out new career opportunities, and enjoy life before “settling down.” For many 20-somethings, this decade also comes with low-paying entry-level jobs and large student loan payments. So, you might ask yourself, why bother with life insurance at this stage of life? It’s important to recognize that purchasing a life insurance policy in your 20s can be a wise financial decision, even if it requires adding another line to your monthly expenses.
In this article
What is life insurance?
Life insurance is a financial contract between an individual (the policyholder) and an insurance company. In exchange for regular life insurance premiums, the insurance company provides a lump-sum payment, known as the death benefit, to the designated beneficiaries upon the policyholder's death. The primary purpose of life insurance is to provide financial protection and support to the policyholder's family or dependents in the event of their death.
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Here are some key points about life insurance:
- Death benefit. The death benefit is the amount of money paid to the beneficiaries upon the insured individual's death. This lump-sum payment is generally tax-free and can be used by the beneficiaries to cover various financial needs, such as funeral expenses, mortgage payments, education costs, and daily living expenses.
- Premiums. To keep the policy in force, policyholders must pay regular premiums to the insurance company. Premium amounts depend on factors such as the policyholder's age, health, lifestyle, and the type of policy selected.
- Types of life insurance products. There are two types of products to choose from.
- Term life insurance: Provides coverage for a specific term (e.g., 10, 20, or 30 years). If the policyholder dies during the term, the death benefit is paid to the beneficiaries. If the policyholder survives the term, the coverage typically expires.
- Permanent life insurance provides coverage for the policyholder's entire lifetime. It includes a cash value component that grows over time, and policies may offer features like the ability to borrow against the cash value.
- Beneficiaries. The policyholder designates one or more beneficiaries who will receive the death benefit. Beneficiaries can be family members, friends, or any individuals or entities chosen by the policyholder.
- Cash value (for permanent life insurance). Permanent life insurance policies accumulate a cash value over time, providing a savings or investment component. Policyholders can access this cash value through loans or withdrawals, but doing so may reduce the death benefit.
- Purpose. Life insurance is commonly used to replace lost income, pay off debts, fund education, and provide financial security for loved ones in the event of the policyholder's death.
Life insurance is an important financial tool for individuals looking to protect their family's financial well-being in the event of their passing. It's crucial to carefully consider the type of policy that aligns with your needs and to review the terms and conditions of the policy before making a purchase.
How much life insurance do I need in my 20s, and why?
Determining how much life insurance you need in your 20s involves considering your current financial situation, future aspirations, and the welfare of those you may leave behind. While the concept of life insurance might seem more relevant for older adults, there are compelling reasons why securing a policy in your 20s can be a prudent decision.
Why get life insurance in your 20s?
- Lower premiums. One of the most significant advantages of purchasing life insurance in your 20s is the lower cost. Insurance companies view younger individuals as lower risk, translating into lower premium rates for the same coverage as older individuals. Locking in these lower rates early can save you substantial money over the policy's life.
- Future insurability. Buying life insurance in your 20s allows you to secure coverage before any potential health issues arise. As you age, the likelihood of developing health conditions that could significantly increase your premiums or make you uninsurable increases. Early purchase protects you against this risk.
- Financial security for loved ones. Even if you don't have dependents now, your situation might change. If you anticipate having a family or if there are people who depend on your income, life insurance can provide essential financial support in your absence. This is crucial for covering living expenses, debts, and future educational costs.
- Debt coverage. Many young adults carry significant debt, including student loans, credit card debt, or mortgages. Some forms of debt, especially private student loans, may not be discharged upon death, potentially leaving co-signers or partners responsible. Life insurance can help cover these obligations.
- Wealth building and estate planning. Some types of life insurance, such as whole life policies, have a cash value component that grows over time and can be borrowed against. This can be a part of your broader financial planning and wealth-building strategy.
Calculating your life insurance needs in your 20s
The amount of life insurance you need depends on several factors:
- Current and future expenses. Estimate your current monthly expenses and consider how they might change. If you plan to have a family, buy a house, or anticipate significant future expenses, these should be factored into your coverage.
- Debts and obligations. Total your debts, including loans and mortgages. Your life insurance should cover these to prevent passing the burden onto your loved ones.
- Income replacement. Consider how many years of income you would want to replace if something happened to you. This ensures that your dependents can maintain their lifestyle without financial hardship.
- Future financial goals. Include the cost of future goals, such as your children's education or a spouse's retirement, in your calculation.
- End-of-life expenses. Ensure your policy covers funeral costs and any associated final expenses.
A common rule of thumb is having a policy 10 to 15 times your annual income. However, online life insurance calculators can provide a more personalized estimate by considering your specific details and financial obligations.
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Types of life insurance
Before choosing a life insurance policy, you should look at the different types of life insurance plans available to you. Each life insurance type offers a unique set of benefits, so you should consider your long-term goals and your budget to find the right type.
Term life insurance
Term life insurance is a policy that only lasts for a set number of years – 10, 20, and 30 years are common term lengths. This is usually the most affordable type of life insurance, making it a good option for most 20-somethings.
When selecting a term life insurance policy, it’s important to consider what you want to happen when the term ends. Some term life insurance policies offer a convertible term option, which allows you to convert the term life insurance policy to a permanent one. Others might allow you to renew the term life insurance policy annually after concluding your term. However, this makes your policy subject to a new insurance premium each year, which can be more costly in the long run than converting to a permanent life insurance policy.
Permanent life insurance
Simply put, permanent life insurance (also known as whole life insurance) remains active (as long as you pay your insurance premiums on time) for your entire life. This can be beneficial because you won’t have to worry about keeping track of when your life insurance policy’s term will end and when you might need to seek a new policy or convert your policy. That said, permanent life insurance is typically more expensive than term life insurance. Some people prefer to start with a term life insurance policy and convert to permanent life insurance when they age.
The unique feature of whole life insurance policies is that they can also have an investment component. With these policies, part of the payment goes toward the policy’s cash value when you make your premium payments. You can borrow money against your policy's cash value to give yourself a loan or use it to make your premium payments. With this type of life insurance policy, you can also surrender the policy to receive the cash value of the policy in full. However, if you do this, your policy will be terminated, and your beneficiaries will not receive anything after you pass away.
Related: Best Whole Life Insurance
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Best life insurance companies for 20-somethings
Each life insurance company offers something different. While there are many great options, some better meet the coverage needs of 20-somethings.
Nationwide
Nationwide offers a wide variety of life insurance policies. This includes term life, whole life, universal life, variable universal life, and indexed universal life. The company isn’t known for having the most affordable life insurance policies. However, it does offer additional benefits and riders that can make spending a little extra money now worth it in the long run.
The Nationwide Guaranteed Level Term policies are designed for people looking for affordable coverage to help with major expenses such as college tuition and mortgage payoffs. It comes with two guarantees – that the rates will not increase during the entire term and that there will be an income tax-free death benefit. After the term expires, the policy is renewable annually up until you reach the age of 95. You can also convert the policy to permanent coverage if it is done before you turn 65.
Living benefit riders may be the biggest part of Nationwide’s appeal. There are chronic illness benefits, critical illness benefits, and terminal illness benefits. These allow you to receive a portion of your policy’s death benefit to help cover your treatment expenses. There is also a Children’s Term Insurance Rider, which can be added to a policy to cover your children. All of these riders are available at no additional cost for most policies.
Protective
Protective offers some of the most competitive life insurance rates, making it a good option for 20-somethings concerned about the extra expense. The company offers both term and permanent life insurance policies. Best of all, its term life insurance policies have benefits that make them a good long-term solution.
The Protective Classic Choice Term insurance policies are available in term periods ranging from 10 to 40 years. Most life insurance providers offer 30-year term life insurance policies at most, so the option to purchase a 40-year term is unique. The policy comes with guaranteed, level premiums to keep your life insurance cost steady and predictable.
If you choose a term life insurance policy from Protective, you can convert it to a permanent one. Best of all, you can do this without needing to undergo and submit a medical exam to the insurance company. You’ll also have the option to add a terminal illness rider if your state permits this. This can be helpful and provide “living benefits” in the form of a cash payout if you are diagnosed with a qualifying terminal illness.
For those whose financial situation allows for it, a permanent life insurance policy from Protective can also be a good choice. The policies come with guaranteed cash value accumulation and a fixed interest rate. You’ll also receive more flexibility in your death benefits and premium payments.
Transamerica
One of the top benefits of purchasing life insurance at a young age is that you’ll be eligible for the cheapest rates. However, young people can still pay a higher premium due to their recreational activities. Even if you don’t have to undergo a medical exam, you may have to answer some basic questions about your health when you request a life insurance quote.
Transamerica offers affordable rates with high coverage amounts, making it a good option for 20-somethings. This company also generally accepts applications from people who have a history of smoking. Some life insurance companies require medical exams for people with a history of smoking, but Transamerica is more flexible about this.
In addition to term and permanent life insurance policies, Transamerica also offers a special type of policy called final expense life insurance. This policy is designed to help loved ones cover your final expenses, such as burial and funeral costs. It comes with lower total death benefits than traditional life insurance policies, ranging from $1,000 to $50,000. These policies also come with a tax-deferred cash value that you can borrow against.
FAQs
Can I afford life insurance in my 20s?
Life insurance premiums are generally lower for younger, healthier individuals, making policies more affordable in your 20s. Many find that term life insurance policies are particularly cost-effective, providing substantial coverage for a low monthly or annual cost. Budgeting for life insurance should consider your current financial situation and future goals, emphasizing the policy's long-term benefits.
What factors should I consider when choosing a life insurance policy in my 20s?
When selecting a life insurance policy, consider your current financial obligations, future goals, health status, and the needs of any dependents. It's also important to research different insurers to compare coverage options, premiums, policy benefits, and any additional riders that might be beneficial. Consulting with a financial advisor or insurance specialist can provide personalized advice based on your specific circumstances.
What type of life insurance policy should someone in their 20s get?
There are two main types of life insurance: term and permanent. Term life insurance is often recommended for individuals in their 20s due to its affordability and straightforward coverage for a specific period, which can be aligned with financial obligations like a mortgage. Permanent life insurance, such as whole life, provides lifelong coverage and a cash value component but at a higher cost, which might be suitable if you have a clear long-term financial strategy or specific needs.
Up to $2 million in coverage
- Get covered in 5 minutes.
- 95% of customers approved.
- No Hassles. No Gimmicks. Easy Application.
- Non-Commissioned Agents.
- Ages 20+
- 100% Online Application.
- Fast Coverage.
The bottom line
Life insurance isn’t just for older folks. Typically, we don’t start thinking about life insurance or our end-of-life plans until we’re close to retirement. However, life insurance in your 20s has several benefits, which should be considered.
Whether you’re planning to raise a family or simply want to make sure you don’t saddle your loved ones with debt, a life insurance policy can provide peace of mind. For many 20-somethings, a term life insurance policy can be a good option, especially if you can convert it to a permanent policy later. No matter what way you go or what policy you choose, life insurance is worth considering, even if you’re only in your 20s.
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Ashley Hart is a lead copywriter and digital marketing expert covering finance, law, real estate, music, entertainment, health and wellness.
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