Buying Life Insurance Young Saves Money!
It’s smart to purchase life insurance in your 20s or early 30s, even if you don’t think you need it.
The honest answer: With very few exceptions, the younger you are when you buy a life insurance policy, the less you’ll pay. It will never be any cheaper than it is today.
Although hundreds of factors determine life insurance premiums, age is one of the most critical components, and it makes a strong case for buying life insurance as early in life as possible.
Let’s consider the reasons why.
Healthy Equals Cheaper…
When a life insurance company considers an applicant, they focus on the risk the applicant is likely to make a claim at some point in the future. When it comes to life insurance, the ultimate risk to the company is the death of the applicant. You probably understand that the death of the applicant requires the company to pay out a death benefit, but that’s not the only risk to the life insurance company. Another is the length of time that the policy is likely to remain in force. People can (and do) cancel life insurance policies at any time, so the longer you hold a policy, the more money that the insurance company will earn.
A life insurance company’s revenue is based upon the premiums collected from every customer, minus the death benefits paid out within that group. Therefore, the critical job of a life insurance company is to minimize the likelihood of an early payout in each policy that they approve. Simply put, your life insurance company wants you to live as long as possible!
Term life policies have limited time periods (for example: 10, 20 and 30 years), so the obvious preference by the life insurance company is that you won’t die before the term expires. In that case, no death benefit will ever be paid out and the premiums collected largely represent profit to the company.
That brings us back to the age factor and why it’s a major component in the determination as to whether or not to approve a policy and at what rate. The younger you are when you apply for a life insurance policy, the less likely it is that the company will ever have to pay a claim. That’s the goal.
As a result, life insurance premiums are generally considerably lower the younger that you are at the time of application. Premiums will typically rise with age since the company has to adjust for the higher risk of death that increased age brings; however, your health will also play an important role. Healthy = cheaper.
If there’s one factor that’s more important than age in determining an applicant’s life insurance risk, it’s health. Statistically speaking, a person who is in excellent health is considerably less likely to see an early death than one who is in poor health. This is why life insurance companies pay particular attention to your medical history when underwriting a policy and why life insurance premiums for smokers can be 10 times the premiums for non-smokers. But even your health is at least loosely related to your age. Since most diseases and impairments tend to develop later in life — typically more toward middle age — excellent health and youth are closely connected.
At least part of the reason why you should get life insurance when you are very young is so that you can get it before any chronic health conditions develop. For most people, the ideal time to buy life insurance is when you’re in your twenties. Though that may seem young, chronic conditions, like high blood pressure and cholesterol, often begin to show up after age 30.
It may seem counter-intuitive, but age and health are strong reasons to buy life insurance before you have an apparent need. Although age may play a role in how much life insurance you need, the decision to buy life insurance has nothing to do with age.
So, when do you need life insurance? Here’s the simple rule: you need to buy life insurance when somebody else depends on your income. Here are some common examples:
– If you’re 25 with a wife who is staying home with a newborn, you DO need life insurance.
– If you’re 29 and single, you DO NOT need life insurance.
– If you’re 27, married, and both you and your spouse work, you might not need life insurance yet, but you may want to start thinking about it anyway.
The fact that you are young and healthy will not only keep the premiums low, but it will also enable you to buy a lot more insurance coverage than you may be able to a few years down the road when you actually do have dependents. In addition, the possibility that you may develop health conditions at about the same time you have a family can never be ignored. It will result in permanently higher costs for life insurance should that happen.
What’s the cost of waiting to buy life insurance? This is perhaps best demonstrated by an example. For this purpose, we’re going to ignore health as a factor in premium costs and focus mainly on age. Let’s say that you are 25 years old, single, childless and in excellent health. Given that profile, you can purchase a 20-year term life insurance policy with a death benefit of $500,000, which will be about enough to cover the average young family. The premium for this policy will be $35 per month, or about $444 per year. Now let’s assume that you decide to wait to purchase life insurance until you are married and have children, at about age 35. The cost for the same 20-year term policy for $500,000 will increase to $72 per month, or about $912 per year. That’s an increase in the premium of more than 50 percent! Worse, it will come at a time when you have family obligations, and extra cash will be short.
The fact that the 20-year policy taken at age 35, the term of the policy will expire at age 55. The only difference — causing an increase in the premium at 35 — will be the fact that you’re 10 years older. That does carry a slight risk of early death, certainly more so than it would at age 25.
Are there any advantages of estate planning while you’re young? The question is a good one and our answer is a resounding yes! There are a few reasons why, but let’s start with the fact that life – at the end of the day – is uncertain. And it’s always better to have a will or living trust set up.
Other reasons for estate planning while you’re young: saving on fees in court and taxes around probate, which, if you don’t have an estate set up, can rack up a lot of costs. It will be less expensive to purchase life insurance now while you are young and in excellent health, than it may be a few years down the road when you have a family to care for.
Life insurance is an important financial tool for many families. If your family couldn’t survive financially without struggling if you or your spouse died, you should probably consider getting a life insurance quote and purchasing coverage. That way, you can have some peace of mind that should the unthinkable happen, your family can deal with the issue at-hand rather than worrying about how they’re going to be able to financially survive.
Life Insurance Amounts for a Family
At the opposite end of the spectrum is a young family. If you have very young children, your need for life insurance is probably greater right now than it will be at any other time in your life. Were you to suddenly die, there would have to be sufficient funds available, not only to cover final expenses, but also to provide sufficient support for your children until they reach adulthood. In addition, you will want to make some sort of provision to pay for their college educations.
In this situation, a $500,000 life insurance policy might be the absolute minimum. For example, it would provide $20,000 for final expenses, $300,000 to provide $20,000 a year for support for the next 15 years, and the remaining $180,000 to be used for their educations. Naturally, it will be much more expensive to have a larger amount of life insurance coverage. In that situation, the young family would likely favour term life insurance.