Why Life Insurance Is Needed When You’re Young

Securing life insurance at a young age may not be the first priority for many, yet its importance cannot be overstated. While it might seem like an unnecessary expense early in life, this financial tool offers benefits that extend far beyond immediate needs.

Considering life insurance sooner rather than later provides significant advantages, ensuring better financial preparedness for the future.

Lower Premium Rates

One key reason to secure life insurance early is the opportunity to lock in lower premium rates. Insurers calculate premiums based on risk, with age being a major factor. Younger individuals typically enjoy better health and fewer pre-existing conditions, resulting in more affordable premiums. For example, a healthy 25-year-old non-smoker might pay $20 per month for a 20-year term policy, while a 45-year-old could pay over $60 for the same coverage. This difference translates into substantial savings over time.

Getting insured early also protects against potential health issues that could increase premiums or make coverage unattainable. Conditions like hypertension or diabetes become more common with age and can significantly impact insurability. By obtaining coverage while in good health, young adults secure long-term peace of mind and avoid future financial challenges.

Coverage for Shared Financial Obligations

Life insurance can help manage shared financial responsibilities. Many young adults share obligations such as co-signed student loans, mortgages, or joint credit card debt. In the event of an untimely death, these debts could fall on surviving co-signers or family members. Life insurance provides a safety net, ensuring these financial burdens don’t become overwhelming for loved ones.

For instance, a young couple purchasing their first home may rely on both incomes to meet mortgage payments. If one partner unexpectedly passes away, the surviving partner might struggle to cover the payments alone. A life insurance policy can provide funds to cover the mortgage balance, helping the surviving partner maintain financial stability and remain in their home.

In family-owned businesses, life insurance offers liquidity to buy out a deceased partner’s share, ensuring continuity. It also helps settle personally guaranteed business debts, safeguarding the financial health of the business and its owners.

Potential Cash Value Accumulation

Certain policies, such as whole life or universal life insurance, allow for cash value accumulation over time. A portion of the premium builds cash value, which grows tax-deferred under the Internal Revenue Code. This feature acts as a financial resource that policyholders can access through loans or withdrawals for needs like education expenses or retirement income. Borrowing against cash value often doesn’t require credit checks, and interest rates are competitive. However, loans or withdrawals reduce the death benefit, underscoring the importance of careful planning.

For estate planning, cash value can help minimize estate taxes. High-net-worth individuals, for example, can use life insurance to preserve wealth for future generations. Placing the policy in an irrevocable life insurance trust (ILIT) shields proceeds from estate taxes, ensuring beneficiaries receive the full benefit without tax erosion.

Shielding Against Unexpected Liabilities

Life insurance acts as a safeguard against unforeseen expenses, such as debts, legal obligations, or final costs like funeral and burial expenses, which average $7,000 to $12,000 according to the National Funeral Directors Association. By having coverage, individuals ensure these costs don’t become a burden on their loved ones or estate.

For estates exceeding the federal estate tax exemption of $12.92 million in 2023, life insurance proceeds can provide liquidity to cover taxes, preventing the forced sale of assets. This is particularly important for maintaining family-owned properties or businesses, ensuring they remain within the family.

By securing life insurance early, individuals can lock in financial protection, manage shared obligations, and build resources for the future, all while shielding loved ones from unexpected financial strain.