Building a strong financial foundation in your 20s begins with having the right tools. A budget is one thing you'll need, especially if you're focused on building an emergency fund, saving for retirement or paying off debt. Life insurance is something else you ought to add to your toolbox.
But does life insurance for young adults make sense? A 2018 survey found that 65 percent of 18 to 29-year-olds don't have life insurance. Of those who lacked coverage, 71 percent said it wasn't necessary because they're young and healthy.
There are, however, some good reasons to consider buying life insurance in your 20s.
The benefits of life insurance for young adults
Life insurance can fill several different financial needs. First and foremost, it can replace lost income for your loved ones if you leave behind a spouse or children who depend on your pay cheque to cover day to day expenses.
If you're a 20-something, you're more likely to be single and childless — but that doesn't mean you'll stay that way. You may decide to settle down in your 30’s or later and at that point the appeal of life insurance may become clearer.
The downside, however, is that by waiting to buy you may be facing higher premiums. Generally, life insurance for young adults is less expensive the younger you are when you initially purchase it.
Aside from replacing lost income, life insurance can also be used to pay off any debts should anything unfortunate happen to you. Legally, co-signers share equal responsibility for a debt. If your parents co-signed on your loans and you pass away, your lender may still expect them to pay what's owed. A life insurance policy could allow your co-signers to zero out the rest of the debt.
Life insurance can also reduce the stress of paying for funeral costs, or any other final expenses. Even a small life insurance policy could be a good investment if you don't want to saddle your loved ones with those costs on your death.
What kind of Life Insurance do you need?
Life insurance for young adults generally falls into two main categories:
1. Yearly Renewal Term Premiums
These premiums are priced on a rate for age system and start low and rise significantly as you age when the likelihood of claiming increases.
2. Level Life Premiums
If you are young and healthy life insurance is cheap. Make sure you lock in level premiums. You’ll pay a bit more at first but over the years you will save thousands of dollars as you will pay the same premiums each year. Level premiums make budgeting easy as you know the cost of your insurance today and in the future. Level premiums can be a more cost-effective option in the medium and long term and make it easier to continue paying insurance given premiums are more affordable later on.
If you already have yearly renewable term cover and wish to switch all or part of it to level life cover it is easy to switch with no underwriting required. You just need to sign a letter for the change to be made.
Tips for buying life insurance
Life insurance for young adults isn't one-size-fits-all and if you're ready to buy, it helps to do your homework beforehand. An Authorised Financial Adviser is a good option – they will do all the leg work by comparing the policies and the premiums to find the policy that best fits your needs and guide the insurance underwriter through the application process.
PS: In the 12-month period up to June 2018 $1.33 billion was paid out in claims by insurers with 39% being paid out on Life insurance policies alone.
Trudi Vossen is an Authorised Financial Adviser and Risk Insurance Specialist at Stewart Group – a Hawke's Bay-based independent financial advisory firm based in Hastings. Stewart Group works with individuals, families, and businesses in New Zealand who are committed to pursuing financial planning and wellbeing. Our clients understand the value of independent, goal oriented and objective financial advice that is free of conflicts. If that sounds like you, we would love to hear from you.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.