Are you just starting out in the real world? Perhaps you recently graduated from college or are taking on your first professional job. If so, you’re probably getting your first consistent paychecks and might be tempted to make purchases such as buying a new car, a home, or even taking your first vacation without your parents. While making certain purchases can be fun or even necessary, there are several reasons life insurance should be your first “big kid purchase.”
Many people think that life insurance is just for people with dependents, or that you need to have lots of assets to protect to purchase it. However, there are several advantages to purchasing a life insurance policy sooner rather than later. The following is everything you need to know to take the first step toward your most adult purchase yet—life insurance.
What is life insurance?
Life insurance is a contract between a policyholder and an insurance company that states that if you pay the premium payments over a set period, they’ll pay out a lump sum upon the insured’s death.
There are many types of life insurance policies. You should work with a financial advisor to discuss your current financial situation, as well as your goals. They’ll then help you select the right life insurance policy to fit your needs.
Reasons to buy life insurance when you’re young
Most people think they only need life insurance if they have a family to protect or if they have insurable interests that need to be protected in the case of their death. However, insurance policies can have more benefits than just a payout at the end of your life.
A popular cliché in the insurance world is, “The best time to buy life insurance is yesterday.” In other words, there are myriad reasons to purchase life insurance as soon as possible. The following are a few things that you should think about as you make your first adult purchases.
It increases in price as you age
If you’d like to have a family someday, or simply to leave a financial legacy, then you can save a lot of money by purchasing life insurance when you’re young. The premiums for life insurance will increase each year as you age. Therefore, you can save a lot of money in the long run by purchasing life insurance now and keeping the premiums low throughout your life.
Funerals are expensive
The average funeral cost in the United States is well over $10,000, not including any luncheons or other events that often complement funerals. Life insurance helps your beneficiaries cover the cost of a funeral when it does happen, even if it isn’t for several decades.
It protects your family’s financial security
If and when you do have a family, life insurance will help protect them in case of the loss of your income. If you pass away while your family still depends on your income, the face value, or a life insurance payout, it will help your family cover costs that your income used to contribute toward. This might mean that your family gets to stay in their home, can cover future debt payments, and has the freedom to take the time they need to grieve.
You have (or are considering having) kids
If you plan to have kids eventually, or even if you already do, life insurance protects them in the case of your death. You can list your children as beneficiaries on your policy, and they’ll receive a portion of your death benefit to use for major expenses such as college, buying their first home, or other necessities.
Your employer’s insurance isn’t enough
Typically, experts recommend that your life insurance cover at least one year of your salary, any debts, and a year’s worth of expenses for your family. Most employer policies only cover one year of your salary. While this is helpful, it might not be enough to cover the long-term needs of your family or beneficiaries. Buying additional coverage may help cover this life insurance gap.
How to find the right policy
There are many types of life insurance. The most common types of policies are term and whole or permanent life insurance. They have a few small but important differences between them:
- Term life insurance covers you until a specified age or for a set number of years, and then no longer covers you. You don’t get any of your premiums back when the policy expires. If you die during the term, your beneficiaries will receive the face value of the policy. Term life insurance is typically the least expensive option for the most amount of coverage, and thus the most popular with young people.
- Whole life or permanent insurance covers you for your whole life. There are several variations of permanent life insurance, which include traditional whole life, variable life, universal life, and variations within each type. In the case of a traditional whole life policy, the death benefit and premium amount will remain the same throughout the life of the policy.
While you can research different types of policies online, it’s important to work with a financial advisor to ensure that you choose the right policy for your needs and budget.
The bottom line
It’s important to consider purchasing life insurance when you’re young. It will save you a lot of money and help set you and your family up for success in the future. Be sure to discuss your needs with a financial advisor before purchasing life insurance.