When buying life insurance, it can feel like an unnecessary expense, as it is most affordable when you’re young and in good health, and more expensive if you’re older and have preexisting conditions that might lead to premature death. However, if you have dependents who rely on your income, then having the peace of mind that comes with life insurance may make it worth the cost. A life insurance policy can provide cash at the time of death and help support your children, spouse or disabled family members.
Healthy young people with no dependents may not have much need for life insurance, but that can change over time as your financial profile grows in complexity. Your insurance needs in your 20s will be quite different from the coverage you may need later on in life.
Having a basic understanding of life insurance options can help you determine the best coverage level for you and your family.
Term vs. whole life insurance
There are two basic types of life insurance policies: term life insurance and whole life insurance. A term life insurance policy lasts for a specific amount of time and then expires while whole insurance is permanent. Here’s a brief look at the differences:
Term life insurance
Generally considered the most affordable type of life insurance, a term policy lasts for a specific period, often from 1 to 30 years. As long as you pay your monthly premium, your policy remains in effect until it expires. The premium goes toward the policy’s death benefit and is paid as an annuity, monthly payment or lump sum.
Whole life insurance
This form of permanent life insurance does not expire. In addition to the death benefit, whole life insurance has cash value held in a tax-deferred savings account. A portion of your monthly premium contributes to the cash value, which accrues interest at a rate determined by your policy. Premiums for whole life can be significantly higher than those for term policies, since there is a cash value and no expiration date.
Buying life insurance in early adulthood
You may not be thinking about life insurance in your 20s, but it’s the most affordable time to get a policy. When you are young and healthy, your rates will be lower. For instance, you may be able to get a 20- or 30-year term policy for as little as $20 to $25 per month.
After an untimely death, the policy can cover a mortgage or rental payments and cosigned or unsecured debts like student loans. Additionally, many people in their 20s and 30s start a business. If the primary business owner dies, many debts will come due, and the business assets will be sold to pay off debts.
Suppose you are carrying substantial debt, especially private student loans or other debt that is not easily forgiven or dismissed. In that case, life insurance can help protect your spouse, children, or cosigners from taking on your obligations post mortem. Choosing a life insurance policy early in adulthood can help you protect assets and prevent your family from taking on any debt you may leave behind. For healthy people, this is one of the best times to get a life insurance policy. Better health means you’ll get better rates and an affordable monthly payment.
If you’re concerned about adding a policy that will expire before you gain a benefit, you may consider getting a universal life insurance policy. Universal life insurance is a form of whole life insurance that allows you to change the premium and death benefit while keeping the same policy.
Buying life insurance during midlife
If you’re in your 40s and haven’t bought life insurance yet, this is a good time to consider getting a policy before your premiums get too high. Considering the average life expectancy in the U.S. is nearly 80 years, getting a 30-year term policy at this age may be a good idea, depending on your other insurance coverage.
If you purchased a term life insurance policy in your 20s, it may expire in your 50s. When you buy another policy at this stage of life, you’re likely to pay higher premiums. If you and your spouse are both in good health, it might make sense to look at a term policy, but there are options if you want to avoid the medical exam.
For those wary of a comprehensive health exam, you may consider a simplified issue life insurance policy—a no exam policy. Of course, this lack of insight into your health means that your premiums will likely be higher. A guaranteed life insurance policy forgoes the health exam like simplified insurance in favor of a simple questionnaire. Your premiums will probably be higher with the questionnaire, as it is not as accurate as a medical exam—which forces an insurance company to accept more risk, which they offset by charging a higher premium. If you’re confident in your health, it may be better for you to opt for the physical exam.
Buying life insurance in your golden years
It’s never too late to buy life insurance, but the choice of whether or not to pay for life insurance becomes a bit more complicated. At this stage of life, premiums for term life insurance can be significantly higher, and options may be limited. However, the policies may still provide support for your spouse and children. If you have an estate or a complex mix of debts and assets going into your later years, it may still make sense to carry a life insurance policy.
Alternatively, if your beneficiaries are financially stable and your estate isn’t particularly complex, final expense insurance could be a better option. Final expense insurance can help your family cover end-of-life expenses such as medical bills, funeral, burial and/or cremation costs, as well as other expenses.
Lastly, suppose you have cosigned on private student loans or other unsecured loans for your adult children or grandchildren. In that case, you may want to consider how an untimely death in the family could impact your retirement. Even if adding life insurance for yourself doesn’t make sense, the comparatively low cost of an insurance policy for a family member may help protect your retirement.
No matter what stage of life you’re at, a life insurance policy can provide you with the reassurance that an untimely death won’t create an undue burden.