We recommend that people buy life insurance as early in life as possible. Life events such as marriage, having children, or owning a business can play a big role in determining when you really need insurance. Generally speaking though, the earlier you purchase life insurance the less money you’ll pay. We like our clients to secure some life insurance coverage before age 35.
Think you’re too young for life insurance? Think again! Buying life insurance coverage young can save you a tremendous amount of money. Here’s a look at some pretty great reasons why buying life insurance in your 20s or 30s can actually save you a bundle and protect you, too! Why should you buy life insurance early? Well, it turns out that there is a very good reason! – The earlier you buy life insurance coverage, the more you’ll save (and in whole life policies the more money you’ll make).
Although there are several factors that determine the cost of life insurance premiums, age is definitely one of the most critical components. For that very reason, the younger you are when you purchase your life insurance, the less expensive your life insurance will be. In the simplest terms, the younger you are, the less you will spend.
Why is Life Insurance Cheaper at a Younger Age?
When a life insurance company considers an applicant, they focus on the risk of the applicant, and the ultimate risk for a life insurance provider is the death of the applicant. The younger an applicant is, the less likely they are to pass away, all else being equal. Obviously, if the insured passes away, the life insurance provider has to pay out; however, that’s not the only risk that the life insurance provider faces. Another risk is the length of time the insured holds the policy. People can cancel life insurance coverage policies whenever they like. A large percentage of people will cancel their policies before a claim is made. When they cancel, the life insurance company keeps all or a portion of their premium payments. That said, the longer you hold a policy, the more income that the insurance coverage company will earn. Younger people are more likely to own a policy for a longer time without cancelling or dying.
A life insurance coverage company’s revenue is based on the premiums collected from every customer, less the death benefits paid out within that group. So, with that said, the most important 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 coverage company wants you to live a long, healthy life. This is important in regard to both whole life policies – which the company will ultimately pay out whether you die or not – but even more in the case of term life policies. Doesn’t it feel good to know that your insurance company has a real interest in you being healthy?
The Difference Between Whole Life and Term Coverage
Term life policies have limited time periods; 25 years, for example. Because of the limited time period that a term life insurance policy covers, this is the obvious preference for life insurance providers. If you do not pass away during the coverage period, no death benefit will ever be paid out, and the premiums collected largely represent profit to the company. Whole life policies will stay in-force your entire life as long as you meet the premium payment requirements.
This brings the age factor back into the picture, and why it’s a major component determining whether or not to approve a policy, and at what rate. The younger you are when you apply for a life insurance coverage policy, the less likely it is that the company will ever have to pay out.
As a result, life insurance premiums are considerably less the younger that you are at the time of application. Premiums rise with age since the company has to adjust for the higher risk of death that increased age brings.
Healthier Also Means Cheaper
There is another factor that is extremely important in determining whether or not a company should provide life insurance, and that’s your health. A person who is in excellent health is considerably less likely to pass away than someone who is in good health. For this reason, life insurance coverage companies pay particular attention to your medical history when underwriting a policy. That is why life insurance premiums for smokers can be 10 times the amount the premiums that non-smokers pay.
Your health can be directly related to your age. Since many diseases and impairments tend to develop later in life, such as heart disease – typically more toward middle age – it is better to get life insurance coverage at a younger age because you will likely be in better health.
One of the benefits of purchasing some life insurance while you are young and healthy is that you are ensuring that you have insurance. If you have a major health problem such as MS, HIV, cancer, heart trouble, or other degenerative diseases, you may not be able to get any life insurance coverage at all. This is not a good situation to fall into considering you may still have financial obligations and beneficiaries to take care of. If you get a policy when you are young, you can even get certain riders allowing you to add to the benefit of the policy no matter what your health situation is.
When to Buy Life Insurance
If you want to keep your premiums as low as possible, the ideal time to purchase life insurance coverage is in your mid 20s. Though that may seem young, chronic conditions like high blood pressure and cholesterol often begin to show up after age 30, which is why buying insurance coverage in your 20s is ideal. If you do get your life insurance policy before any these conditions develop, you’ll pay substantially less in premiums.
Buying life insurance at this young age does bring up a very valid question: Should you buy life insurance coverage before you have a real need to? It may seem counter intuitive, but age and health are strong reasons to buy life insurance before you have an apparent need. So it may not be so ridiculous then to purchase a large term life insurance coverage policy even before you are married and have children.
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.
Additionally, 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?
Say that you are 23 years old, for example; you are not married and you don’t have any children, and you are in excellent health. You can purchase a 30-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 $74 per month, or about $888 per year.
On the other hand, let’s say that you decide to wait to purchase life insurance coverage until you are married and have children, at about age 35. The cost for the same 30 year term policy for $500,000 will increase to $115 per month, or about $1,380 per year. That’s an increase in the premium of more than 50 percent! What’s worse is that it will come at a time when you have financial obligations, and extra cash will likely be short.
The good news is that you can avoid this problem by reducing the term of the policy down to 20 years. At age 35, a 20 year term policy for $500,000 will be $76 per month, or about $912 per year. That will keep the premium about identical to what you could have gotten 10 years earlier. However, the down side to this is that it will reduce the term of the coverage by a full decade.
The fact that the 20 year policy taken at age 35 is just about the same as the 30 year policy taken at age 25 is not a coincidence. In each case, the term of the policy will expire at age 55. That means that the risk between the two policies is just about equal. The only difference – causing a small 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.
While you are taking into consideration all the other financial priorities that you have as a young adult, you might also want to give some time and attention to taking care of potential future life insurance needs. It will be less expensive to purchase life insurance coverage 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.