Playing it Smart: Life Insurance for Your 20’s
Posted by Guest on Feb 20, 2013 in Recommendations | 6 comments
The following is a guest post.
People in their 30’s often look back on their 20’s and slap their palm against their forehead, saying, “Darn! Why didn’t I do this then?!” and that is that you want to try and avoid here. Planning ahead is always a good idea for any facet of life, but it is especially true for the purposes of life insurance.
Perhaps you don’t currently have a family, but if you’re planning on having one within the next 10 years—statistically, 10 years is the average length of time someone in their 20’s predicts they’ll have a family by—then it’s smart to buy now, while the rates are cheap.
Of course, it’s important to start with the basics and really understand the different types of life insurance so that you know what you’re getting yourself into.
TWO TYPES OF LIFE INSURANCE
Life insurance comes in two main packages that you absolutely must know the difference between before you even go sit down with an agent. These two insurance types are:
- Whole Coverage, &
- Term Coverage
WHOLE COVERAGE
When you purchase a whole life insurance policy, you’re making an investment, and with any monetary investment it is possible to see a return in the form of tax-free cash. However, despite this perk to the policy, a whole policy is not often recommended by financial experts—specifically, to young adults.
This is due to the fact that rates are much higher and the policies come with a fair amount of fees and commissions built-in; all of which are very difficult to get out of, should you be unhappy with the policy, as the surrender charges are through the roof.
However, there are certainly situations when purchasing a whole policy is a very good investment and these situations usually involve circumstances where you’re the sole provider for someone in need. If you know that this is a life-long commitment, then purchasing a permanent life-long policy makes sense.
TERM COVERAGE
For someone in their 20’s, however, a term life insurance policy is almost always the recommended path by almost all, non-crooked, agents. If you’re in your 20’s, with no prior medical history or dependents, and have an agent pressuring you buy a whole policy, this is a red flag. It’s important to be smart about who’s trying to give you what you need, and who is just trying to make a bigger commission.
With a term policy, you’re covered for a set amount of years and do not receive any kind of investment incentive, outside of death benefits (i.e. no tax-free cash). However, this is a fixed-premium policy, so what you sign on to pay annually is all that you will ever pay throughout the life of the policy.
This is where buying young is playing it smart! In your 20’s, you’ll receive a very affordable premium that you can carry with you for the next 30 years if you choose. Any new family, or potential family, will be covered at a low cost.
“Term coverage is the appropriate coverage for most individuals, as their needs are for a certain term of years, while their other assets accumulate, such as retirement savings.” – Tony Steur, author of Questions and Answers on Life Insurance: The Life Insurance Toolbox
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I would definitely recommend going with a term policy as well. As you stated, I’m glad that we bought our policies in our 20′s. The rates were under $20.00 a month, and we even get a return of premium. Honestly, I think everybody should have at least a little bit of coverage.
Greg@ClubThrifty recently posted..Debt: 4 Reasons to Leave Debt Behind Today
Term insurance is definitely the way to go, especially if you can manage to get it young to lock in those low rates. We actually just added another $50k for my wife for only $5/month. We had called USAA for another issue and they offered it with no questions asked.
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I am going to disagree that term is ‘definitely the way to go’. My husband and I have whole life insurance policies for a few reasons. As you say it is an investment. Ours is tied to the S&P500 and while capped at 14% max growth, the savings portion of the policy is growing making this an additional investment vehicle for us. Second, it is cheap and permanent. While we are young and in good health we wanted to lock something down. Good health doesn’t run in our family and our parents are now un-insurable. We don’t want that to be us. And my husband is an entrepreneur. There are certain tax and bankruptcy protections for money placed in life insurance that are not available for other investments. Do we plan to use this benefit, hell no. But it never hurts to have a bit of your portfolio set aside to lest risky investments.
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I agree having life insurance is so important, whether it’s term or whole – that’s a personal choice/need. So many people overlook insurance as unnecessary. I get insurance isn’t sexy and it can get a bad rep, thanks to some shady insurance agents. But if you truly want to take care of your loved ones, you must have insurance. It might be something you grumble about paying every month, but if something happens, you’ll be glad you have it. Also, some employers offer their employees term insurance as part of their benefits package. A word of potential caution – very rarely are those plans portable – meaning it’s tied to your employment. So if/when you leave, you insurance coverage ends. You may want to go with a private provider to lock in your rate and not worry about portability issues.
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Great post! You did a great job clearly defining the two types of policies. I had no idea I needed to start looking into life insurance now. Thank you for better preparing me for the future!
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It seems like a term coverage policy would be the smartest choice if you plan to start a family within the life of the health insurance plan. This is most likely what I’ll consider when forced to buy my own health insurance (doesn’t this happen at 27?) Seems beneficial to be able to add on any dependents to an already flat rate.
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