Should I Get Life Insurance in My 20s?

Summary: Life insurance in your 20s can be a powerful financial tool that not only helps pay for your funeral in the event of your untimely demise but also many other expenses. Your family may not be prepared if you pass away at a young age and premiums may be challenging for some, however, there are many benefits and lower costs when you purchase a policy earlier in life. Estimated Read Time: 9 mins

Thinking about your life insurance death benefit, the amount of money your beneficiaries would get when you die isn’t always on the minds of twenty-year-olds.

Yet, being prepared is important for anyone, regardless of age, and the benefits of life insurance for young adults can make this financial safety net an affordable option to protect loved ones.

When you’re younger and healthier, premiums for life insurance policies are cheaper and they can help your loved ones pay for if the unthinkable happens.

Not only can you help cover the loss of your income and pay off debts loved ones might be left to deal with, but funerals alone are expensive. The National Funeral Directors Association reports that the national median cost of a funeral with a viewing and burial was $8,300 in 2023, and $6,280 for a funeral with cremation, before extras such as cemetery costs.

Do you need life insurance in your 20s? It’s likely. Below, we’re looking at the reasons why life insurance can benefit young adults, the advantages of purchasing a policy at a younger age, and how to find the right coverage for your needs.

Why Should I Get Life Insurance in My 20s?

Getting life insurance in your 20s is crucial for securing your family’s future and easing financial burdens.

By starting early, you lock in lower premiums and ensure coverage for outstanding debts and funeral expenses.

Life insurance also acts as income replacement for dependents, maintaining their quality of life in case of your passing.

Furthermore, early policy initiation allows for potential cash value growth over time, offering flexibility for future financial needs.

Overall, investing in life insurance in your 20s is a proactive step towards long-term financial security for you and your loved ones.

The Pros and Cons of Buying Life Insurance in Your 20s

Life insurance is essential when you have significant debts or loved ones relying on your income, even at 20.

It provides financial protection in case of accidents and ensures debts won’t burden others.

Additionally, some policies offer riders that pay part of the death benefit early if you’re diagnosed with a terminal illness, and cash value policies can serve as tax-deferred savings.

To help you understand whether or not buying life insurance in your 20s is right for you, here are the pros and cons:

Pros of Life Insurance in Your 20s

There are many benefits of getting life insurance at a young age, including lower premiums, a longer period of coverage, more flexible coverage, and an increased cash value:

• Lower Premiums: Younger individuals often pay less for insurance due to lower risks, resulting in cheaper premiums compared to older individuals.
• Longer Coverage: Life insurance for a young person provides coverage in case of premature death, offering financial security for loved ones and the potential to leave a legacy or assist with retirement planning.
• Flexible Coverage: Certain policies, like permanent life insurance, may allow you to increase coverage periodically without a medical exam, providing flexibility for future needs or changes in health status.
• An Increased Cash Value: Starting in your 20s allows more time for cash value to grow on a tax-deferred basis. Loans and withdrawals can give you access to that money later, but they reduce the death benefit and can have tax consequences.

Cons of Life Insurance in Your 20s

While there are many benefits of life insurance at a young age, you should consider all angles before signing up. Purchasing a life insurance policy can be expensive for young adults and result in a bill they might not need for a longer period of time:

How Much Life Insurance Do You Need in Your 20s?

There is no single right amount. The National Association of Insurance Commissioners (NAIC) suggests asking how much of your household’s income you provide, how your survivors would get by, whether anyone else such as a parent or sibling depends on you, and how your family would pay final expenses and debts. The NAIC notes that some experts suggest buying five to eight times your current income, but your own situation matters more than a rule of thumb.

The Insurance Information Institute (Triple-I) offers a practical way to think about it:

• No dependents: If no one relies on your income and you have enough to cover final expenses, you may not need life insurance at all.
• Dependents: Buy enough that, combined with other income sources, it replaces the income you provide plus the cost of services you handle, such as child care.
• Hidden income: Don’t forget workplace benefits that would end at your death, such as an employer’s share of health insurance premiums and 401(k) matching.
• Expenses at death: Triple-I suggests planning for at least $15,000 for funeral, tax and estate costs.

Also count resources your family would already have. Triple-I’s guide to buying life insurance lists Social Security survivor benefits, group life insurance through an employer and other assets. The Social Security Administration explains that survivor benefits can provide monthly payments to an eligible spouse, divorced spouse, child or dependent parent of someone who worked and paid Social Security taxes.

What Happens to Your Debts in Your 20s?

Many people in their 20s carry student loans, a car loan or credit card balances. How those debts are handled at death affects how much coverage you need:

• Federal student loans: Under federal regulations, a Direct Loan is discharged when the borrower dies, and a Parent PLUS loan is discharged if the student it was borrowed for dies. A death certificate is required.
• Private student loans: The Consumer Financial Protection Bureau says private lenders aren’t legally required to cancel loans when a borrower dies, so in some cases the debt may pass to a spouse or cosigner. Check your loan terms.
• Cosigned loans: If a parent cosigned a car loan or private student loan, they can remain responsible for it. A term policy sized to cover that balance protects them.

Term vs. Permanent Life Insurance: How It Works

The Texas Department of Insurance life insurance guide explains that term life covers a set period, anywhere from one year to 30 years or longer, and pays a death benefit only if you die during that term. Two features matter for people in their 20s:

• Convertibility: lets you exchange a term policy for a permanent policy without a medical exam or health questions, which helps if your health changes. Converting raises your premium.
• Renewability: lets you keep coverage after the term ends, usually at a higher premium.

Triple-I’s guide to choosing the right type of life insurance recommends term coverage when you need protection for a specific period or need a large amount of coverage on a limited budget. It notes that premiums are lowest when you are young and increase on renewal as you age. Permanent insurance makes more sense if you need coverage for life or want a savings element that grows on a tax-deferred basis.

Riders Worth Knowing About

The NAIC describes several riders you can add for an extra cost. A guaranteed insurability rider lets you increase your death benefit at certain times without a medical exam, with the price based on your age and the amount of the increase. An accelerated death benefit lets you take money from your death benefit if you’re diagnosed with a terminal illness. Riders raise your premium, so add only the ones you’d actually use.

Group Life Insurance Through Work

Many young workers get some life insurance as a job benefit. TDI says a basic group policy usually pays one or two times your annual salary, often without health questions, but coverage typically ends when you leave your job. That makes group coverage a useful starting point rather than a complete plan, especially in your 20s when job changes are common.

Protections When You Buy a Policy in Texas

A few consumer protections are worth knowing before you sign, according to TDI:

• Free-look period: Texas policies have a free-look period of at least 10 to 20 days, during which you can cancel for any reason and get a full refund.
• Two-year contestable period: If you die within two years, the insurer may review your application and can deny payment if information was wrong or left out. Answer health and lifestyle questions accurately.
• Licensed companies: Buy from a company licensed in Texas. Licensed companies belong to a guaranty association that pays claims if a company fails.
• Projections aren’t promises: Charts showing cash value growth are usually projections, not guarantees.

Example: Two Texans in Their 20s

Consider two 26-year-olds. Maya in Austin is single, rents and has federal student loans. Because her federal loans would be discharged at her death, her main costs would be final expenses, and her employer’s group policy may be enough for now. She might still buy a small, inexpensive term policy if she wants coverage that doesn’t depend on her job.

Daniel in Houston is married, just bought a home with a 30-year mortgage and is expecting a child. His spouse would depend on his income and need help with the mortgage. A 30-year term policy sized to replace several years of income and cover the mortgage could fit his budget, with a conversion option in case his needs change.

Common Mistakes to Avoid

• Relying only on workplace coverage. It usually ends when you change jobs.
• Buying more permanent coverage than you can afford. A lapsed policy protects no one.
• Not comparing companies. Triple-I suggests checking a company’s financial strength and buying from a company licensed in your state.
• Forgetting beneficiaries. Name primary and contingent beneficiaries, and update them after major life events.
• Overlooking other coverage. Young adults often need renters insurance too, which protects your belongings and provides liability coverage.

• Difficulty Paying Premiums: Young adults starting careers or families may struggle to afford the higher premiums of permanent coverage. Inconsistent payments can cause permanent life insurance policies to lapse, leaving the policyholder without coverage.
• Longer Premium Payment Period: Policies often require premiums to be paid throughout your entire life or for an extended period, resulting in more years of payments. While buying young means lower premiums, it also means more years of payments.
• Potential Lack of Immediate Need: Purchasing insurance at a young age may provide little benefit if you remain single and do not prioritize leaving a financial legacy, resulting in spending on unused coverage.
• The Opportunity Cost of Paying Premiums: Paying costly insurance premiums entails an opportunity cost, as funds could be used elsewhere, such as investing in the stock market for potentially higher returns. Some may opt for cheaper term coverage and invest the difference.

Best Whole Life Insurance for 20s

In your 20s, opt for term life insurance if you have a tight budget and need temporary coverage. It’s affordable but expires at the end of the term.

Whole life insurance is pricier but lasts your entire life and builds cash value. Choose based on your insurance goals.

Life insurance, whether term or permanent, is cheaper in your 20s. Even if you don’t need it now, getting a policy prepares you for future needs.

Speak with an insurance broker to explore options and determine the right choice for your situation, or request a free quote.

Frequently Asked Questions

Is life insurance worth it if I’m single with no kids?

It may not be essential. The Insurance Information Institute says that if you have no dependents and enough money to pay final expenses, you usually don’t need life insurance. It can still make sense if you have cosigned debt, help support a parent or sibling, or want to lock in coverage while you’re young and healthy.

How long should my term be?

Match the term to the need. If you just bought a home with a 30-year mortgage or plan to have children, a 20- or 30-year term can cover the years when people depend on you most.

Does my beneficiary pay income tax on the death benefit?

Generally, no. According to the IRS, life insurance proceeds received as a beneficiary because of the insured person’s death aren’t included in gross income, although any interest paid on the proceeds is taxable.

Should I review my policy when my life changes?

Yes. Marriage, divorce, a new baby or a new home are good times to review your coverage and beneficiaries. Our guides to insurance for married couples and divorce and insurance in Texas cover other policies to update at the same time.

Sources:

• Statistics, National Funeral Directors Association
• Life Insurance, National Association of Insurance Commissioners
• How much life insurance do I need?, Insurance Information Institute (Triple-I)
• 8 smart steps for buying life insurance, Insurance Information Institute (Triple-I)
• How to choose the right type of life insurance, Insurance Information Institute (Triple-I)
• How do I pick a life insurance company?, Insurance Information Institute (Triple-I)
• Survivor benefits, Social Security Administration
• 34 CFR 685.212: Discharge of a loan obligation, Electronic Code of Federal Regulations
• What happens to my student loans if I die or become disabled?, Consumer Financial Protection Bureau
• Life insurance and disability insurance proceeds, Internal Revenue Service
• Life insurance guide, Texas Department of Insurance