‘Life insurance for me? You sure? Isn’t that something people buy when they get old and have a lot of responsibilities?’
When asked if they have life insurance, most young adults are likely to give this response. Perhaps, you also think along the same lines. But the thing is, age has got nothing to do with life insurance.
If someone depends on you financially, you need life insurance (regardless of your age). And that person does not have to be a spouse or a child; it could be a parent, a grandparent, or a close relative.
Apart from securing the financial future of your loved ones, you can use life insurance to cover a loan (like a home loan or a private student loan) and start building toward retirement. And the best part is that the insurance costs are low when you are young, so you can lock in cheap rates for decades.
So, what is the best life insurance for young adults?
Keep reading to find out more.
What is Life Insurance for Young Adults?
Life insurance for young adults is the same type of coverage available to other buyers. However, as a young adult your financial goals are likely to be different from someone in their 40’s or 50’s.
An older adult may want to leave an inheritance or fund their spouse’s retirement. Younger adults, on the other hand, may need life insurance to cover their debts (like a mortgage or credit card loan), or want to start saving for retirement, or to have a life insurance plan in place before they develop any hard-to-insure health conditions.
Just like others, young adults can either buy a term life or a permanent life policy. Term life insurance policies come with an expiry date and have only purpose — to pay out the death benefit if you die within the policy term.
Permanent life insurance policies, by contrast, last for your whole life (provided you pay the premiums). Many of them also include a savings component, called cash value, which grows over time. Both whole life and universal life plans include permanent coverage and cash value. Between the two, whole life insurance is less complicated and offers guaranteed cash value growth.
If you want to start building toward retirement, a whole life plan might be ideal for you. If you do not want a built-in savings component but would like to leave an inheritance or cover end-of-life expenses, consider a simple permanent life plan. That is, one that offers lifelong coverage without the cash value.
Term life insurance, on the other hand, is a great option for all those who are looking for affordable coverage. It can be six to 10 times cheaper than whole life insurance. For young and healthy people, the rates for a term plan can be as low as the cost of an extra-large pizza.
What Does Life Insurance Cover?
The proceeds from your life insurance policy can help your family avoid financial hardship after you are gone. They can use the payout however they like. In the short term, the death benefit can help them cover end-of-life expenses, monthly bills, and debts. In the long run, it can help pay for your child’s college tuition fees.
Your family may use the payout to take care of monthly bills, groceries, and other household essentials.
A co-signed student loan
If a loved one has co-signed a student loan with you, they will become legally responsible for it if you die. Purchasing a life insurance policy with the co-signer of your student loan as a beneficiary can help them pay off the balance in the event of your death.
Mortgage and other debts
For most people, their home is their biggest asset. If you have bought a house with a mortgage, it makes sense to protect it. The last thing you would want is for your family to lose their home or exhaust their savings to pay off the mortgage balance should you pass away unexpectedly.
A life insurance policy, besides being a sound income replacement tool, can help cover large debts, like a mortgage or a credit card loan. Since all debts come with an end date, a term life plan may work out better if you want to use it primarily to cover debts.
A couple of things to keep in mind are:
- The death benefit should at least be equal to the sum total of all your debts. If you plan to take a debt in the future, factor it in too.
- The policy term should at least be as long as the length of your biggest debt. For example, if the mortgage is your largest debt and the amortization period is 30 years, buy a 30-year term life plan.
There is no denying that children are expensive to raise. On average, raising a child in Canada costs anywhere between $10,000 - $15,000 per year until the age of 18. Depending on your lifestyle, this figure could be even higher.
If something were to happen to you tomorrow, your spouse can use the policy amount to pay for child-related expenses.
Your loved ones can also use the death benefit amount to pay for end-of-life expenses, including funeral costs. If you have never given much thought to how much these expenses are, you might be surprised to know traditional burial averages around $7,000 to $10,000 in Canada.
If you do not have life insurance and pass away early, your loved ones will have to pay for these expenses. And if there are any unpaid medical bills, they will have to shoulder an even heavier financial burden. Taking out a life insurance policy helps you avoid such a situation. Your family can use the payout to cover all end-of-life expenses.
The proceeds from your policy can help the surviving spouse to fund college tuition for children.
How to Find the Best Life Insurance Companies for Young Adults
Looking for the best life insurance for young adults? Here are three tips that will help you pick the right insurer.
Comparison shopping is the only way to ensure you do not pay a penny more for coverage than you have to. Grab quotes from as many providers as you can to give yourself the best chance to save on life insurance premiums.
Read the fine print
Most term life insurance policies include the guaranteed renewability clause. Which means the insurer cannot turn down your request for renewing the policy (provided you are below the maximum renewal age). Also, the provider cannot factor in any changes in your health while calculating your renewal premium rate. While your premium is likely to go up at renewal, the increase will purely be due to age.
You should always pick a policy that includes this feature. If you do not, and your life insurance needs change down the line, you may find yourself in a bind, especially if you develop a hard-to-insure health condition. The provider can raise your price prohibitively or refuse to renew coverage, leaving you without protection at a time when you may need it most.
Check out the insurer’s financial health
Life insurance is a long-term contract. It may be decades before your policy pays out. So, make sure the provider you pick is financially stable. To determine how well a provider is doing financially, look at its AM Best rating — an independent agency specializing in rating insurance companies based on their financial health. A high rating with AM Best means the insurer is strong financially, and you can count it to keep its promise whenever the time comes.
Why Get Life Insurance as a Young Adult?
Life insurance costs less when you buy it young compared to when you buy it later in life. Purchasing life insurance in your 20’s or early 30’s allows you to lock in low rates for decades (in the case of term life insurance) or your entire life (in the case of a permanent life policy). And if you are looking to put a whole life plan in place, buying early will mean you will have more cash value to fund your retirement.
How Much Does Life Insurance Cost?
Life insurance premium rates are unique to the applicant. Two people of the same age are likely to receive different price quotes for the same coverage. That is because various factors influence premium rates, although age is one of the most important ones.
The younger you are, the lower the cost of life insurance. Buying a policy as early in life as possible is always a great strategy since you get to lock in a cheap premium rate for decades.
Apart from age, other factors that life insurance costs are:
Women live longer than men on average. In Canada, the average life expectancy for women is 84 and 80 for men. All things being equal, women pay less for life insurance coverage than men.
Health has a huge impact on life insurance rates — and for a good reason. People with an active lifestyle tend to live longer. On the other hand, certain conditions, like obesity, can shorten your life and increase the chances of an early life insurance payout. Given all this, it is not surprising that life insurers reward healthy people with better rates.
Life expectancy is the basis of premium rates. And if there is one factor that impacts your lifespan significantly, it is tobacco use. Smokers die 10 years earlier than non-smokers, on average. They also have a greater risk of developing critical illnesses, like stroke and cancer. So, if you smoke, brace yourself for high life insurance rates.
Smoking rates can be two or three times higher than a non-smoking rate. How much more you will have to pay depends on your age, sex, and coverage amount. Generally speaking, the difference between the rates for smokers and non-smokers is not so much in the early years. That is all the more reason to buy life insurance when you are young.
Family medical history
Certain illnesses (like diabetes and heart disease) tend to run in families. If you have a family history of any such condition, your price could go up.
Occupation and hobby
Insurers also take your occupation and hobbies into consideration. A dangerous job or hobby could increase your premium rate. Although every provider has its own definition of “dangerous”, it generally includes any activity that increases the risk of severe injury or death.
Type of life insurance policy
Life insurance plans are either term or permanent. With term life insurance, you get protection for a set period. By contrast, a permanent life policy provides lifelong coverage (as long as you pay premiums). Many permanent life insurance plans also have an investment account, called cash value. However, these perks do not come cheap. On average, premiums for a permanent life plan are significantly higher than a comparable term plan.
All things being equal, the shorter the policy term, the lower the premium rate is. An insurer is more likely to pay out on a 30-year term plan than on a 10-year one.
Last but not the least, the size of the death benefit impacts your premium rate. If it goes up, so would the cost.
You need life insurance if someone depends on your earnings, or you have shared debts. Term life insurance is a good choice for most people since it is affordable and easier to understand. A whole life policy, however, may work well for someone who wants to start saving money for their retirement. Whether you are looking to buy a term or permanent life plan, Dundas Life can help you get the best rate.