Should I Get a Life Insurance Policy As a Young Adult in My 20s?

“I don’t need it because I’m young and healthy” is one of the most common myths about life insurance. Life insurance is absolutely appropriate for many young people, even those without dependents to provide for or significant debts to their name.

With relatively low premiums, flexible coverage amounts, and the option to save even more by laddering coverage, term life insurance is particularly attractive to would-be policyholders in their 20s. Twenty-somethings who cross this important item off their to-do lists reap some notable benefits, including lower life insurance premiums on average than older applicants, longer terms at lower cost — again, on average — and protecting surviving relatives from the financial burden of funeral expenses.

Getting life insurance — and getting on with life — is even easier with low-friction digital life insurance agencies like Haven Life, which blends the security of doing business with a financially rock-solid life insurer like MassMutual and the convenience we’ve all come to expect from financial technology.

Why You Need Life Insurance in Your 20s: Pros of Getting a Policy As a Young Adult

If you’re putting off your life insurance application because you’re not sure you’re old enough to need it, it’s time to reconsider. Consider applying before your 30th birthday and enjoy the likelihood of lower monthly premiums, the flexibility to design a multi-policy ladder that works for you, and the peace of mind that comes with ensuring your loved ones are protected should the unexpected occur — among other benefits.

1. Locking in a Relatively Low Premium

Life insurance premiums vary for a variety of reasons: policyholder age, tobacco use, term length, coverage amount, family health history, and life insurance company underwriting standards. You won’t know your premium for sure until you apply for coverage and complete the underwriting process.

However, it’s no great secret that age is among the most important determinants of life insurance premiums. Imagine two similar applicants: both male non-tobacco users in great health with similar family health histories, applying for the same amount of coverage. The only real difference between the two is their age: one is 25 and the other is 35. The 25-year-old will almost certainly qualify for a lower premium per unit of coverage than his senior.

In other words, it pays to apply for life insurance coverage at a younger age.

2. Lower Risk of Medical Underwriting Issues

Most life insurers require medical underwriting for higher-value policies. That is, applicants must consent to a basic medical exam as a condition of coverage. These exams are thorough but not invasive, and although they sometimes uncover abnormalities that could correlate with underlying health conditions, many applicants pass them with flying colors.

Because health conditions that may reduce life expectancy are less common among younger adults, medical underwriting is less likely to adversely impact 20-something life insurance applicants’ premiums or chances of approval than older applicants’. This is another potent argument in favor of applying early, when you’re least likely to have any major health concerns.

And if you’re not comfortable with medical underwriting for whatever reason? You can skip that part of the process with a no-exam policy. Because they’re riskier for insurers, no-exam policies tend to have lower maximum coverage limits and higher premiums than traditional policies. But they’re not skimpy — Haven Life’s Haven Simple1 no-exam term life policy provides coverage up to $500,000, for example. And applying for no-exam coverage2 is even easier than applying for traditional coverage — Haven Simple’s application process is 100% digital.

3. Getting a Longer Term Without Paying More

The likelihood of death is actually quite low for policyholders in the 25- or 30-year-old age band. The difference in life insurance premiums available to these applicants reflects what could happen to them later in life, when their policies remain in effect and their risk of death is much higher.

A term life insurance policy’s term — the timespan during which it remains effective at a fixed premium — is a function of its length. The same policyholder who applies at the same point in time for the same amount of coverage will always pay more for a 30-year term than a 10-year term because they’re much more likely to die while the former policy remains in effect.

This is basic math, but it’s not the whole story. When you apply for longer-term coverage also determines the cost of that coverage. A 30-year policy that begins when you’re age 25 ends when you’re age 55; a 30-year policy that begins at age 35 ends at age 65. Because your risk of death is higher between age 55 and age 65 than between age 45 and age 55, you’ll pay more for the same coverage duration if you wait to apply.

Applying for coverage early also preserves your flexibility to create a multi-policy “ladder” that maximizes coverage when you need it without undue financial burden. A ladder allows you to step down coverage as you accumulate wealth and reduce existing and expected debt obligations.

If you expect your 60th birthday to find you owning your home outright, planning your youngest child’s college graduation, and readying to retire in a few years, you expect to need little if any life insurance coverage in your 61st year. If that’s the year your relatively modest, low-premium, life insurance policy’s 30-year term expires — a decade after a larger 20-year policy and two decades after an even larger 10-year policy — then good on you.

4. Getting More Coverage at a Lower Cost

You might not know for sure at age 22 or 25 how much life insurance you’ll need at age 42 or 45. But you already know that the earlier you apply, the more coverage you’ll get for the same cost. This is important if you expect your future life insurance needs to be substantial.

Getting life insurance early on helps keep your options open too. Many online options can’t match Haven Term’s3 high coverage limits — up to $3 million for those ages 18-59.

5. Covering Debts That Might Survive You

Most debts don’t pass to survivors when you die. That is, if you die before your spouse, they probably won’t be personally obligated to settle your outstanding credit card bills or student loans. (The rules are different for joint accounts, for co-signed debts, and for residents of community property states, so be sure to check with an estate planning expert or financial advisor before making sweeping assumptions.)

This doesn’t mean most of your debts will be forgiven in death. Generally, debts that don’t directly transfer to a surviving heir or co-signer become the responsibility of the deceased person’s estate. They’re settled using the estate’s assets: the contents of checking, savings, and investment accounts, along with cash raised by liquidating other assets like cars or real estate. The greater the value of the debts settled by the estate, the less the estate has left to pass on to heirs.

Adequate life insurance short-circuits this process. That’s because life insurance death benefits, by law, don’t pass through the policyholder’s estate. Those benefits go directly to the life insurance beneficiary — typically a surviving spouse or children.

6. Ensuring Your Survivors Aren’t on the Hook for Final Expenses

If you die without enough in the bank to cover the cost of your funeral and related “final expenses,” your survivors will have to foot the bill. Even a small life insurance policy — one worth perhaps $100,000 — should be more than adequate to keep this from happening. Think of your policy as one last gesture of fiscal respect to those you leave behind.

7. Building Cash Value in a Permanent Life Insurance Policy

For a whole host of reasons, including lower cost and greater flexibility as policyholders move into middle age, term life insurance may be a better fit for 20-something applicants than other types of life insurance.

Young adults shouldn’t completely close the door on permanent life insurance, however. Before applying for coverage, you’ll want to be sure you’re choosing the right life insurance policy for your needs.

That means understanding the differences between term and permanent or whole life insurance — especially the cash value component of a permanent policy, which can grow to considerable size over time and provide a crucial source of low-cost borrowing power for policyholders who don’t own their own homes or who need more borrowing power than a home equity loan or line of credit can provide.


Should You Hold Off on Getting a Life Insurance Policy As a Young Adult?

Life insurance isn’t an absolute necessity for every 20-something. Although the case for getting covered early in your adult life is quite strong, there are two persuasive reasons to wait. Both boil down to: “I’ll know more in a few years.”

Your Future Financial Needs Might Not Yet Be Clear

Many people in their 20s aren’t sure what they’ll be doing in a year, let alone 10 or 20. For many, homeownership remains a financial impossibility, putting yet-to-be-born kids through college an abstraction, and retirement a distant dream. With so much yet to be decided, estimating one’s future life insurance needs is all but impossible.

Under these circumstances, it’s tempting to put the search for life insurance on hold until things come into focus. But that strategy might not be the best most, even for would-be policyholders who genuinely have no idea where they’ll be five years down the road.

A better move: getting a toehold in the life insurance market with a modest 30-year policy that sets you up for whatever lies ahead without breaking the bank. If you’re too busy for a medical exam, remember Haven Simple — at age 22 or 25 or 28, a no-exam policy won’t be exorbitant.

You May Still Need Life Insurance After Your Term Ends

You’ll probably be wealthier and less debt-burdened in 30 years, but there’s a decent chance you’ll still have obligations ahead: college tuition, an outstanding mortgage balance, dependents who don’t yet support themselves financially. You might have new obligations you can’t imagine right now, like a spouse who’s unable to work due to a debilitating medical condition.

The bottom line is, you might still need life insurance after the initial term ends on the policy or policies you took out in your 20s. Does that mean you should wait five or 10 years to apply for your first policy? Not necessarily.

Financially speaking, you may be better served by establishing the first rung on your life insurance ladder now with a low-value, low-premium, 30-year policy, and then adding more coverage when you’re a bit older but still relatively young.


Final Word

The case for getting life insurance in your 20s is stronger than you might think. Locking in low rates early, maximizing the flexibility of your multi-policy ladders, ensuring that your current and future heirs and survivors are protected before life gets in the way — these are just some of the many reasons to apply sooner rather than later.

Term life insurance isn’t the only financial product you’ll need to get a head start on building and sustaining lifelong wealth, of course. Even before applying for your first life insurance policy, make it a top priority to lay out a comprehensive financial plan and begin building an emergency savings fund capable of sustaining you through at least six months of financial hardship.

As every life insurance policyholder knows, the unexpected can happen at any time. But fortune, as they say, favors the prepared.

Sponsored by Haven Life Insurance Agency
1 Haven Simple is a Simplified Issue Term Life Insurance Policy (ICC20 HAVEN SIMPLE in certain states, including NC) issued by C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
2 Issuing the policy or paying its benefits depends on the applicant’s insurability, based on their answers to the health questions in the application, and their truthfulness.
3 Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY. In CA, Haven Term is DTC-CA. Our Agency license number in California is 71922 and in Arkansas, 100139527

Source: moneycrashers.com

Indexed Universal Life (IUL) vs. 401(k)

Indexed Universal Life (IUL) vs. 401(k) – SmartAsset

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When creating your personal retirement plan, there are a variety of tools you can use to fund your long-term savings goals. An employer-sponsored 401(k) is one of them while indexed universal life insurance (IUL) is another. A 401(k) allows you to invest money on a tax-deferred basis while also enjoying a tax deduction for contributions. Indexed universal life insurance allows you to secure a death benefit for your loved ones while accumulating cash value that you can borrow against. Understanding the differences and similarities between IUL vs. 401(k) matters for effective retirement planning. Working with a financial advisor can also make a substantial difference in the amount of money you’ll have when you retire.

What Is Indexed Universal Life Insurance?

Indexed universal life insurance is a type of permanent life insurance coverage. When you buy a policy, you’re covered for the rest of your natural life as long as your premiums are paid. When you pass away, the policy pays out a death benefit to your beneficiaries.

During your lifetime, an IUL insurance policy can accumulate cash value. Part of the premiums you pay are allocated to a cash-value account. That account tracks the performance of an underlying stock index, such as the Nasdaq or S&P 500 Composite Price Index. As the index moves up or down, the insurance company credits the cash value portion of your policy each year with interest.

IUL is different from fixed universal life insurance or variable universal life insurance. With fixed universal life insurance your rate of return is guaranteed, making it the least risky of the three. With variable universal life insurance, your cash value account is invested in mutual funds and other securities so you’re exposed to more risk. An indexed universal life insurance policy fits in the middle of the risk spectrum.

Cash value that accumulates inside an IUL insurance policy grows tax-deferred. You can borrow against this cash value if necessary, though any loans left unpaid at the time you pass away are deducted from the death benefit.

What Is a 401(k)?

A 401(k) is a type of qualified retirement plan that allows you to set money aside for retirement on a tax-advantaged basis. Contributions are deducted from your paychecks via a salary deferral. Your employer can also offer a matching contribution. The IRS limits the amount you can and your employer can contribute each year.

With a traditional 401(k), contributions are made using pre-tax dollars. Any money you contribute is automatically deducted from your taxable income from the year. When you begin taking money out of your 401(k) in retirement, you’ll pay ordinary income tax on withdrawals. Any withdrawals made before age 59.5 may be subject to a 10% early withdrawal penalty as well as income tax.

Traditional 401(k) plans allow you to invest in a variety of securities, including mutual funds and exchange-traded funds. Target-date funds are also a popular option. These funds automatically adjust your asset allocation based on your target retirement date.

There’s no death benefit component with a 401(k). This is money you save during your working years that you can tap into in retirement. Unless you’re still working with the same employer, you’re required to begin taking minimum distributions from a 401(k) beginning at age 72. Failing to do so can trigger a tax penalty equivalent to 50% of the amount you were required to withdraw.

IUL vs. 401(k): Which Is Better for Retirement Savings?

Indexed universal life insurance and 401(k) plans can both be used as investment tools for retirement. But there are some important differences to note. With IUL, returns are tied to the performance of an underlying index. If the index performs well, then your policy earns a higher interest rate. If the index underperforms, on the other hand, your returns may shrink. Your insurance company can also cap the rate of return credited to your account each year, regardless of how well the underlying index does. For instance, you may have a cap rate of 3% or 4% annually.

In a 401(k) plan, you have the option to invest in index mutual funds or ETFs but you’re not locked in to just those investments. You can also choose actively managed funds, target-date funds and other securities, based on your time frame for investing, goals and risk tolerance. Your rate of return is still tied to how well those investments perform but there’s no cap. So, if you invest in an index fund that goes up by 20%, you’ll see that reflected in your 401(k) balance.

A 401(k) also affords the advantage of an employer matching contribution. This is essentially free money you can use to grow retirement wealth. With an indexed universal life insurance policy, you’re responsible for paying all of the premium costs.

Another big difference between the two centers on tax treatment and withdrawals. With an indexed universal life insurance policy, you can borrow against the cash value at any time. You’ll pay no capital gains tax on loans and no penalties unless you surrender the policy completely or fail to repay what you borrow. Death benefits pass to your beneficiaries tax-free.

With a 401(k), you generally can’t tap into this money penalty-free before the age of 59.5, even in the case of a hardship withdrawal. You may be able to avoid a tax penalty if you’re withdrawing money for qualified medical expenses but you’d still owe income tax on the distribution. You could take out a 401(k) loan instead but that also has tax implications. If you separate from your employer with an outstanding loan balance and fail to repay the loan in full, the entire amount can be treated as a taxable distribution.

Qualified distributions in retirement are taxable at your regular income tax rate. And if you pass away with a balance in your 401(k), the beneficiary who inherits the money will have to pay taxes on it. Talking with a tax professional or your financial advisor can help you come up with a plan for managing tax liability efficiently both prior to retirement and after.

The Bottom Line

Indexed universal life insurance and a 401(k) plan can both help you build wealth for retirement but they aren’t necessarily interchangeable. If you have a 401(k) at work, this may be the first place to start when creating a retirement savings plan. You can then decide if IUL or another type of life insurance is needed to supplement your workplace savings as well as the money you’re investing an IRA or brokerage account.

Tips for Investing

  • When using a 401(k) to invest for retirement, pay close attention to fees. This includes the fees charged by the plan itself as well as the fees associated with individual investments. If a mutual fund has a higher expense ratio, for instance, consider whether that cost is justified by a consistently higher rate of return.
  • Consider talking with a financial advisor about how to maximize your 401(k) plan at work and whether indexed universal life insurance is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to get personalized recommendations for professionals in your local area in just minutes. If you’re ready, get started now.

Photo credit: ©iStock.com/yongyuan, ©iStock.com/kupicoo, ©iStock.com/Piotrekswat

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.

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Indexed Universal Life vs. Whole Life Insurance

Indexed Universal Life vs. Whole Life Insurance – SmartAsset

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Life insurance can provide a measure of financial protection against the worst-case scenario. Whole life insurance and indexed universal life insurance (IUL) are two types of permanent policies you might consider if you’re interested in lifetime coverage. While both policies can offer the opportunity to accumulate cash value while leaving behind a death benefit for your loved ones, they aren’t exactly the same. Understanding the differences between IUL vs. whole life insurance can help you decide which one may be right for you.

A financial advisor can help you sort through all the decisions that go into successful financial planning, not just deciding which type of insurance is appropriate.

Whole Life Insurance, Explained

Whole life insurance is a type of permanent life insurance. When you buy a whole life policy, you’re covered for life as long as your premiums are paid. This is different from term life insurance, which only covers you for a set term, say 20 or 30 years.

With a whole life insurance policy, you have a guaranteed death benefit that’s paid out to your beneficiaries when you pass away. Premiums usually remain level even as you age and the policy accumulates cash value over time.

You can borrow against that cash value if needed or use it to cover the premiums for your policy. Any outstanding loans remaining when you pass away are deducted from the death benefit that’s paid to the policy beneficiaries.

Indexed Universal Life Insurance, Explained

Indexed universal life insurance is also permanent life insurance coverage. Similar to whole life insurance, IUL insurance policies can accumulate cash value over time. You can take out loans against the cash value or leave it in the policy to grow.

The biggest difference between whole life and IUL is how cash value accumulates. With a whole life insurance policy, the cash value is guaranteed by the insurance company. If you’re using life insurance as an investment, that means the rate of return on your policy is fairly predictable.

Indexed universal life, on the other hand, works differently. The rate of return and the rate at which cash value accumulates in the policy is based on the performance of an underlying stock market index. Stock market indexes track a particular sector or segment of the market. So, for example, your IUL policy may track the movements of the S&P 500 Composite Price Index or the Nasdaq.

While the return potential for an indexed universal life policy can be higher than whole life insurance, returns aren’t unlimited. Insurance companies can impose a cap rate or ceiling on your returns each year. For instance, your policy might have a cap rate of 3% or 4% annually. The insurance company may also offer a minimum guaranteed rate of return.

IUL vs. Whole Life: Which One Is Better?

Indexed universal life insurance and whole life insurance can both help you accumulate cash value while retaining a death benefit. But one may suit you better than another, depending on your financial needs and goals. This is where it helps to understand what each one is designed to do. For instance, you might choose a whole life insurance policy if:

  • You’re interested in guaranteed, stable returns year over year
  • You want reassurance that premium costs won’t increase over time
  • You want a guaranteed death benefit with the option to borrow cash from the policy if needed

Whole life insurance is more expensive than term life insurance, but it can be less expensive than indexed universal life insurance. Guaranteed returns also make it the less risky option of the two, which may appeal to you if you’re looking for a more conservative addition to your financial plan.

On the other hand, there are some benefits to choosing an IUL policy over whole life. For example, you may consider an indexed universal life policy if:

  • You’re interested in earning higher returns
  • You need or want flexible premiums
  • You’re looking for a way to supplement retirement income

Indexed universal life insurance carries more risk since your returns hinge on how well the policy’s underlying index performs. It’s possible that you could even lose money but those losses may be limited if your insurance company offers a guaranteed minimum rate of return.

You also have more leeway with IUL insurance premiums compared to whole life insurance premiums. For example, you may be able to adjust your premium amount or temporarily suspend making premium payments and allow them to be covered by the policy’s cash value.

With both types of policies, the cash value can grow on a tax-deferred basis. You wouldn’t owe capital gains tax on earnings unless you were to surrender the policy. And any death benefits passed on to your policy beneficiaries would be tax-free.

How to Choose a Life Insurance Policy

Life insurance is something most people need to have and there are several questions to consider when choosing a policy. Specifically, ask yourself:

  • How long you need coverage to remain in place
  • What amount of coverage is appropriate for your financial situation
  • How much you’re comfortable paying toward premium costs
  • Whether you’re interested in accruing cash value
  • What degree of risk you’re comfortable taking

These questions can help you determine whether term life or a permanent life insurance policy is the better fit. And if you opt for permanent life insurance, they can also help you decide between IUL vs. whole life insurance.

Don’t forget that there’s also a third permanent life insurance option available: variable universal life insurance. With variable universal life insurance, you’re investing the cash value portion of the policy directly into mutual funds or other securities, rather than tracking a stock market index. This type of policy can offer the highest return potential but it can also carry the most risk.

Talking to an insurance agent or broker can help you decide whether IUL vs. whole life insurance or another type of life insurance, makes the most sense. You may also want to talk to your financial advisor about how to use life insurance effectively when crafting your estate plan.

The Bottom Line

Indexed universal life insurance essentially combines an investment tool with a life insurance policy. You might find that attractive if you’ve exhausted your 401(k) contributions or IRA contributions for the year but still have money to invest. On the other hand, you might lean toward whole life insurance if you want a guaranteed death benefit with lifetime coverage.

Tips for Estate Planning

  • Using an online life insurance calculator can help you determine how much life insurance you need. Generally, financial experts often recommend having anywhere from 10 to 15 times your annual income in coverage but the specifics of your situation may dictate having a larger or smaller death benefit.
  • Talk with your financial advisor about the best type of life insurance for your needs and how much coverage to get. If you don’t have a financial advisor yet, finding doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area in minutes. If you’re ready, get started now.

Photo credit: ©iStock.com/AleksandarGeorgiev, ©iStock.com/PeopleImages, ©iStock.com/designer491

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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